Week 1 Introduction to Macroeconomics

Question 1

What is GDP?

Answer 1

GDP is the total market value of all final goods and services produced in an economy over a given period of time.

Market value - calculating the value of productio at market prices (QXP), then sum them all up

‘Final goods and services’ - gets to the final user, not intermediate goods( goods used to produce other goods), e.g. it takes a lot of materials to build a car, but the car itself counts as GDP.

‘given period of time’ -different frequencies of time

Question 2

What is Real GDP and GDP per capita?

Answer 2

this is the value of GDP adjusted to inflation

GDP per capita is the value of GDP divided by the population of the country ( average output per person in an economy)

Question 3

What do we mean by Economic Growth?

A. Long-run improvements in general living standards

B. Long-run improvements in education, health, and anything else that contributes to wellbeing

C. Long-run increases in Gross Domestic Product (GDP)

D. Long-run increases in Gross Domestic Product (GDP) per capita

E. No idea bro

Answer 3

A, B and C.

GDP is not a good indicator of living standards.

Question 4

Why is GDP not a good indicator of living standards?

Answer 4

it does not directly account for leisure, environmental quality, levels of health and education, activities conducted outside the market etc

Question 5

So what is the general meaning of GDP?

Answer 5

General meaning

○ Long-run improvements in general living standards

■ Consumption of goods and services, education, health, and anything else that contributes to wellbeing

Question 6

Who among these countries has the highest GDP per capita today?

A. United States

B. United Kingdom

C. China

D. Niger

E. Ireland

Answer 6

Ireland is the correct answer ( from the data we have in lectures followed by US, then UK, then China, the Niger

Question 7

What is the formula for GDP?

Answer 7

The sum of consumption (C) + Investments( I) + Government purchases( G) and Net exports ( NX)

Question 8

What is another name for the GDP formula?

Answer 8

Income expenditure idenitiy

Question 9

What is the difference between durable and non durable goods?

Answer 9

Durable goods - provides utlitity overe time ( a car)

Non durable goods- provides utility straight away ( fruit food)

Question 10

What does Consumption in the income expenditure identity include?

Answer 10

Goods and services in the hands of consumers, we have durable and non durable goods. Services like netflix are included in the GDP.

Question 11

What are 3 types of investment?

Answer 11

Fixed investment ( Non residental) - such as plants, equipment, machines

Fixed investment ( Residental) - such as houses built in the current period of interest.

Inventory investment - goods that are ready and avaliable to sell, so storage.

Question 12

What are the problems of using GDP as a measure of standards of living?

Answer 12

Doesnt take into account the black market ( illegal activites, durg market)

It leaves out non-market activites such as grandparetns looking after children, which in poorer countries take a lot of their GDP.

Difficult to measure govt production such as defense services as it is typically not sold on the market.

Question 13

What is the difference between GDP and GNP?

Answer 13

GNP - is the value of output produced by domestic factors of production, regardless of whether the production takes place inside the countrys border.

GDP - only takes into account output produced in a specific terrtitory.

Question 14

What is the formula for GNP

Answer 14

GNP = GDP + NFP ( NET FACTOR PAYMENTS) this is income paid to domestic factors of production by other countries

Question 15

In Macroeconomics we are concerned about how GDP changes over time, what are the 2 ways GDP changes over time?

Answer 15

Prices and Quanitites

Question 16

To calculate Real GDP what do we keep constant?

Answer 16

We keep prices constant so we can isolate the effect on quanitites.

Question 17

What does the inflation rate allow us to determine?

Answer 17

it allows us to determine how much of an increase in GDP is nominal ( prices going up) and how much is real( production going up)

Question 18

How would you calculate nominal GDP and percentage increase in Nominal GDP from year 1 to year 2?

Answer 18

P X Q

Question 19

How do we calculate Real GDP, first what do we have to do?

Answer 19

We have to keep prices constant, ie we need to have a base year fixed prices.

Question 20

If we use Year 1 as base year, what is the Real GDP and percentage increase from year 1 to 2?

Answer 20

Question 21

Now lets use Year 2 prices as the base year, calcuate the Real GDP?

Answer 21

Question 22

Depending on base year, what is the differences in Real GDP?

Answer 22

You get different growth rates for Real GDP depending on the base year, this is problematic and not a fair representation ( using BY of year 1 prices Real GDP is 35.4 and using BY of year 2 prices, gives us a Real GDP of 31.2%).

Question 23

What do the National statstitcs office use, due to the different growth rates of Real GDP using different base years?

Answer 23

Chain weighted average of Real GDP in year 1 and 2

This answer was in between the 31.2% and the 35.4%

( Real GDP USING BASE YEAR PRICES 1 AND REAL GDP USING BASE YEAR PRICES 2, SQUARE ROOTED = ANSWER)

The answer should of been 33.2%

Question 24

Economists like to know the price level over time,thus they need a measure of prices in the economy, which is what?

Answer 24

Impilicit GDP price deflator - Nominal GDP/ REAL GDP X 100

This is always going to be equal to 100 because Nominal and Real GDP are exactly the same. ( this is called an index number, this shows you how things evolve with respect to a base line case)

Question 25

So in the base year the implicit GDP deflator is always going to be what?

Answer 25

100

Question 26

Calculate the percentage increase each year and chain weighted average each year?

Answer 26

Question 27

What is another way to calculate how prices change over time?

Answer 27

Consumer price index ( CPI) - A price index measuring the value of a basket of goods bought by a typical consumer, used to measure inflation.

CPI = price of a basket of goods in a year / prices of a basket of goods in base year X 100

Question 28

Calculate CPI using 2016 as base year?

Answer 28

Question 29

Calculate impilict GDP price deflator for 2010 and what it means using ( we calculate real GDP using year 2009 prices)?

Answer 29

Nominal GDP/ Real GDP X 100 = 160/124 X 100 = 129%

This means there was a 29% inflation as GDP price deflator in year 2009 was 100 ( 110/110 x100) and 2010 was 129)

Question 30

What is a problem with CPI?

Answer 30

TBA

Question 31

What is the difference between a stock and a flow variable?

Answer 31

Flow variables refer to variables that are measured over a period or per unit of time.(say a year) Stock variables, on the other hand, mean those variables that are measured at a point in time.( say 31 december 2004)

Question 32

What type of variable is investment, GDP etc,

Answer 32

Are flow variables

Question 33

What is private dispoable income and the forumla?

Answer 33

This is the resources avaliable to the private sector to spend.

TR - e.g pension payments or unemployment benefits.

Question 34

What is private sector saving and how do you calculate it?

Answer 34

Question 35

How would you calculate government savings?

Answer 35

Or government surplus

Question 36

How do you calculate national savings?

Answer 36

Question 37

Choose which one of the following is a macroeconomic question.

Select one or more:

a. What is the optimal mechanism for distributing a vaccine?
b. Does inequality affect the way in which monetary policy works?
c. How should we regulate a bank in order to avoid its bankruptcy?
d. Did letting Lehman Brothers go bankrupt cause the Great Recession?

Answer 37

a) this is more of a micro question
b) This is a macroeconomic question, as it concerns how monetary policy changes affect the economy.
c) This is a tricky one! This did not used to be a macroeconomic question, but the recent experience of the Financial Crisis made us realize that it actually is a macro question! The regulation of the banking system has traditionally focused on avoiding a bank’s bankruptcy or dealing with the consequences of it.
d) This is a standard macroeconomic question regarding the causes of recessions.

Question 38

Which of the following events will definitely contribute to UK GDP this year being higher than UK GDP last year? When considering each event, assume that nothing else has changed between the two years (including prices and wages, if it is relevant).

Select one or more:

a. The construction sector produces new buildings worth a total of £1BN this year.
b. . Households purchase £10BN worth of residential property. Last year’s figure was £9BN.
c. Consumption of kangaroo meat by British households increases by 10% from last year.
d. Forest fires force the government to increase by 10% its spending on firefighters

Answer 38

a) While the £1BN of new buildings is part of this year’s GDP, we cannot say if it contributes to an increase over last year because we are not told what the sector’s output was in that year.
b) Households’ purchases of residential properties have gone up from last year, but we don’t know whether these are new houses or already-existing houses. GDP only includes newly-produced goods and services.
c) Household consumption has gone up, but kangaroo meat is an import. Only goods and services produced domestically are part of GDP.
d) The output of the government sector is part of GDP, and it is largely measured by the compensation paid to government employees. Since this has increased by 10%, it does contribute to an increase in GDP

Question 39

Which of the following statements about growth are correct?

a. GDP per person has been stagnant for most of human history and significant growth is a recent phenomenon
b. The average British resident today almost certainly lives in greater comfort than an aristocrat in the early 18th century
c. Some African countries have measured GDP per capita lower than Britain’s 1,000 years agod.
d) Growth in GDP per capita is always positive

Answer 39

A B C

B) GDP per capaita has definetely grown since then so suggesting greater comfort.

Question 40

Problem set The Economy of King’s Landing The economy of King’s Landing consists of an orange producer, some consumers, and the government. In the current year the orange producer grows 30 million oranges. The price for one orange in King’s Landing is £5. Consumers bought 20 million oranges from the producer, 5 million oranges are stored as inventories, and 5 million are bought by the government to feed the King’s Guard. The orange producer pays £60 million in wages to consumers and £20 million in taxes to the government. Consumers pay £10 million in taxes to the government, receive £10 million in interest on the government debt, and receive £5 million in pension payments from the government. The profits of the orange producer are distributed to consumers. The King of the Seven Kingdoms hired you to give a report at the next meeting of the Small Council which will have to make some crucial decisions, as war with Winterfell is imminent. Your report needs to be as precise and accurate as possible, since the penalty for bad advice is death by decapitation (the King doesn’t mess around, and I hear he is completely crazy…)

a. Calculate the GDP in King’s Landing. (Slow and Dumb)

Answer 40

We can calculate it in two ways. Remember that the GDP is the market value of goods and services produced in a country in a specific period of time. The market price of oranges is £5 each, the production is 30 million, hence GDP is £5 × 30 = £150 million.

Another way in which we could infer the GDP is by calculating it as the sum of the components of the aggregate expenditure: C + I + G + (x-m). Hence, consumers buy 20 million oranges, so consumption equals £100 million. The orange producer adds 5 million oranges to inventory, so investment equals £25 million. The government buys 5 million oranges, so government spending equals £25 million. Net export is zero. GDP therefore equals £100 + £25 + £25 = £150 million.

Question 41

The economy of King’s Landing consists of an orange producer, some consumers, and the government. In the current year the orange producer grows 30 million oranges. The price for one orange in King’s Landing is £5. Consumers bought 20 million oranges from the producer, 5 million oranges are stored as inventories, and 5 million are bought by the government to feed the King’s Guard. The orange producer pays £60 million in wages to consumers and £20 million in taxes to the government. Consumers pay £10 million in taxes to the government, receive £10 million in interest on the government debt, and receive £5 million in pension payments from the government. The profits of the orange producer are distributed to consumers. The King of the Seven Kingdoms hired you to give a report at the next meeting of the Small Council which will have to make some crucial decisions, as war with Winterfell is imminent. Your report needs to be as precise and accurate as possible, since the penalty for bad advice is death by decapitation (the King doesn’t mess around, and I hear he is completely crazy…)

Calculate private disposable income, private sector saving, government saving, national saving, and the government deficit. Is the King’s Landing government budget in deficit or surplus? (ZL: Fast and Dumb)

Answer 41

Private dispoable income = Y + NFP + TR + INT - T

. Summing up, Y^d = £150 + £0 + £5 + £10 − £30 = £135 million,

Private saving: S^p= Y^d - C

Private disposable income is £135 million, consumption is £100 million, therefore S^p” = £35 million.

Question 42

Problem set part bIn 2020 and in 2021, there are two products produced in Zombieland: sniper rifles and Twinkies. In 2020, Zombie Slayers Ltd builds and sells 20 sniper rifles at £1000 each, and in 2021, they produce 25 sniper rifles and sell them at £1500 each. In 2020, Tallahassee Harrelson Inc. produces and sells 10,000 Twinkies for £1.00 each, and in 2021, 12,000 Twinkies are sold for £1.10 each. .

a) Calculate nominal GDP in each year. (Slow and Dumb)

Answer 42

Question 43

In 2020 and in 2021, there are two products produced in Zombieland: sniper rifles and Twinkies. In 2020, Zombie Slayers Ltd builds and sells 20 sniper rifles at £1000 each, and in 2021, they produce 25 sniper rifles and sell them at £1500 each. In 2020, Tallahassee Harrelson Inc. produces and sells 10,000 Twinkies for £1.00 each, and in 2021, 12,000 Twinkies are sold for £1.10 each.

b. Calculate real GDP in each year, and the percentage increase in real GDP from 2020 to 2021 using 2020 as the base year. Next, do the same calculations using the chainweighting method. (Fast and Dumb)

Answer 43

With 2020 as the base year, we need to calculate both years’ production by using 2020 prices. In the base year, 2020, real GDP equals nominal GDP and equals £30,000.

In 2021, we need to value 2021’s output at 2020 prices. 2021 real GDP = 25 × £1000 +12,000 × £1.00 = £37,000.

The percentage change in real GDP equals (£37,000 − £30,000)/£30,000 = 23.33%

. We next calculate chain-weighted real GDP. At 2020 prices, the ratio of 2021 real GDP to 2020 real GDP equals g1 = (£37,000/£30,000) = 1.2333.

We must next compute real GDP using 2021 prices. 2021 GDP valued at 2021 prices equals 2021 nominal GDP = £50,700. 2020 GDP valued at 2021 prices equals (20 × £1500 + 10,000 × £1.10) = £41000. The ratio of 2021 GDP at 2021 prices to 2020 GDP at 2021 prices equals g2 = (£50700/£41000) = 1.2367.

The chain-weighted ratio of real GDP in the two years therefore is equal to gc = square root 1.2333 X 1.2367= 1.23496.

The percentage change in chain-weighted real GDP from 2020 to 2021 is therefore approximately 23.5%.

Question 44

In 2020 and in 2021, there are two products produced in Zombieland: sniper rifles and Twinkies. In 2020, Zombie Slayers Ltd builds and sells 20 sniper rifles at £1000 each, and in 2021, they produce 25 sniper rifles and sell them at £1500 each. In 2020, Tallahassee Harrelson Inc. produces and sells 10,000 Twinkies for £1.00 each, and in 2021, 12,000 Twinkies are sold for £1.10 each.

c. Calculate the implicit GDP deflator and the percentage inflation rate from 2020 to 2021 using 2020 as the base year. Next, do the same calculation using the chainweighting method. (Fast and Dumb

Answer 44

To calculate the implicit GDP deflator, we divide nominal GDP by real GDP, and then multiply by 100 to express as an index number.

With 2020 as the base year, base year nominal GDP equals base year real GDP, so the base year implicit GDP deflator is 100.

For the 2021, the implicit GDP deflator is (£50,700/£37,000) × 100 = 137.0. The percentage change in the deflator is therefore equal to 37.0%.

With chain weighting, and the base year set at 2020, the 2020 GDP deflator equals (£30,000/£30,000) × 100 = 100. The chain-weighted deflator for 2021 is now equal to (£50,700/£37,048.75) × 100 = 136.85. The percentage change in the chain-weighted deflator equals 36.85%.