ECON 209
Summer 2025
Homework Assignment 1
This problem set is due on Monday the 26th of May 2025 at 10 pm (EST). Late submissions will not be accepted. If you use any AI tool in your solution, include a text explaining how you used AI in your submission.
Problem 1: Measuring GDP
Consider an imaginary economy where exist only three firms: Ticos, Kakey, and Redries.
• Ticos sells new cars only to households for a value of $60,000. They hire workers and pay them a total of $10,000.
• Redries produces and sells strawberries. In particular, Redries sells strawberries to a foreign country (Perulandia) for a value of $20,000. People in Perulandia like eating strawberries produced by Redries. Additionally, Redries also sells strawberries to Kakey for a value $15,000.
• Kakey uses both strawberries bought from Redries and imported milk to produce and sell cheesecakes to households for a value of $25,000. The value of imported milk is equal to $5,000. Kakey hires bakers to prepare the cheesecakes, so they get paid in total $3,000.
Question: Compute the value of GDP using the three approaches. Provide details on your answer.
Problem 2: Measuring Prices
Consider the following information about goods produced and consumed in another imaginary economy:
• Goods produced in the economy: cookies, butter, electric transformers, and margarine.
• They import computers from abroad.
• Households do not consume electric transformers; they consume cookies, butter, margarine, and comput- ers.
Questions: Let the base year be 2021.
a) Compute the GDP deflator for all the years. Calculate the inflation rate for each year (except 2021, of course) using this price index.
b) Compute the CPI for all the years. Calculate the inflation rate for each year (except 2021, of course) using this price index.
c) Is there any difference between inflation rates obtained from a) and b). If so, why is it the case?
d) Which of the two price indexes do you think reflects “better” the cost of living in the economy?
e) Do you believe that changes in cost of living are exactly the same as changes provided by inflation rates obtained with CPI? If not, explain your reasoning. [Hint: think about the substitution bias, and maybe pay attention to values (prices and quantities) in 2021 and 2022.]
Problem 3: Working with data - Understanding inflation and wages
Using the excel file “inflation and wages.xlsx”, answer the following:
• Focus on the subsample from Jan1980-Dec1989.
- Plot the inflation rate (in this case, it is the monthly % variation of prices). What can you say about this economy?
- Plot the nominal wage.
- Plot the real wage.
- How is it possible that they look so different? Provide an explanation.
• Focus on the subsample from Jan1995-Jun2010.
- Plot the inflation rate (in this case, it is the monthly % variation of prices). What can you say about this economy?
- Plot the nominal wage.
- Plot the real wage.
- Do you think people in this economy are doing better after mid-90s? Explain your reasoning with the data provided.