[5 pts. each] A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat into flour and then sells the flour to a baker for $3.00. The baker uses the flour to make bread and sells the bread to an engineer for $6.00. The engineer eats the bread.
[a] What is GDP in this economy? Explain.
[b] Value added is defined as the value of a producer’s output minus the value of the intermediate goods that the producer buys to make the output. Assuming there are no intermediate goods beyond those described above, calculate the value added of each of the three producers.
[c] What is total value added of the three producers in this economy? How does it compare to the economy’s GDP? Does this example suggest another way of calculating GDP?
[5 pts.] Place each of the following transaction in one of the four components of expenditure:
[a] Boeing sells an airplane to the Air Force.
[b] Boeing sells an airplane to American Airlines.
[c] Boeing sells an airplane to Air France.
[d] Boeing sells an airplane to Amelia Earhart.
[e] Boeing builds an airplane to be sold next year.
[5 pts.] How does chain-weighted measure of real GDP work? Why did the Bureau of Economic Analysis think that the chain-weighted measure of real GDP is better than the traditional measure? According to the data in the table below, please compute RGDP in 2020 and 2021, respectively, by using the chain-weighted measure.
Year
Apple
Pizza
Price
Quantity
Price
Quantity
2019
$4
50
$6
200
2020
$8
100
$14
160
2021
$10
120
$10
180
[5 pts.] Real GDP per capita in the United States in 2010 is $47,284 and its counterpart in India is $3,339. Do you believe that the standard of living in U.S. is 14.16 times high as that in India? If not, please list at least three reasons and explain how each of the reasons affect actual gap of the standard of living between the two countries. In other words, the number, 14.16, overstates or understates the actual gap according to your argument? Again, you are supposed to find any data or evidence to support your ideas.
[5 pts.] Suppose that the year you were born someone bought $100 of goods and services for your baby shower. How much would you guess it would cost today to buy a similar amount of goods and services? Now find data on the consumer price index and computer the answer based on it. (Use the BLS’s inflation calculator here: http://www.bls.gov/data/inflation_calculator.htm)
[5 pts.] Suppose that people consume only three goods, as shown in this table:
Tennis Balls
Golf Balls
Battles of Gatorade
2011 price
$2
$4
$1
2011 quantity
100
100
200
2012 price
$2
$6
$2
2012 quantity
100
100
200
[a] What is the percentage change in the price of each of the three goods?
[b] Using a method similar to the consumer price index, compute the percentage change in the overall price level.
[c] If you were to learn that a bottle of Gatorade increased in size from 2011 to 2012, SHOULD that information affect your calculation of the inflation rate? If so, how? Does it actually affect inflation rate in reality? If not, is the reported inflation rate overstated or understated?
[d] If you were to learn that Gatorade introduced new flavors in 2012, SHOULD that information affect your calculation of the inflation rate? If so, how? Does it actually affect inflation rate in reality? If not, is the reported inflation rate overstated or understated?
[5 pts.] What are the three steps that a government follows in order to construct the CPI in reality? Why does the Consumer Expenditure Survey matter?
[5 pts.] Why does the historical data show that the CPI is more volatile than the core CPI? Based upon Paul Krugman’s article, Additional Reading Material #2 available on Moodle, briefly explain why the core CPI might be informative for the Federal Reserve (or the central bank).
[5 pts.] If your monthly wage is $3,000 in 2010 and the CPI in 2010 is 218. Now suppose that your boss and you reach an agreement that the expected CPI in 2011 is 220 and your monthly wage is indexed for inflation. What will be your monthly wage in 2011? [Please show your work for full credit. Do not skip the middle steps.]
[5 pts.] List the three categories used by the Bureau of Labor Statistics to classify each adult (16 years of age and older) in the economy. How does the Bureau compute the unemployment rate?
[5 pts.] Describe the two ways the Bureau of Labor Statistics measures total employment.
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