ECO136 Introduction to Economics II

Problem Set I

Chapter 21-22-23

Chapter 21: Measuring National Output and National Income

1. Suppose an individual wish to determine the level of economic activity for a particular economy.
To do so, assume that the individual calculates the level of consumption, investment, and
government consumption and investment for a given period. Also assume that the individual ignores
the level of net exports (NX) when calculating this measure of economic activity; call this
alternative measure of output GDPalt. Under what condition(s), if any, will this alternative measure
of output yield a calculation of the level of economic activity that is less than the correct level of
economic activity (i.e., as represented by the definition of Gross Domestic Product discussed in
class)? Briefly explain.

2.

Using the above figures, compute the subtotals for each of the four major spending categories and label
them. Then compute the value of GDP.

3. Define GNP and GDP. Explain the difference between GNP and GDP. Why is the difference
between GNP and GDP small for most countries?
4.

a. Using the above table calculate the nominal GDP for 1987.
b. Calculate real GDP for 1988 using 1987 as the base year.
c. Calculate the percentage increase in Real GDP from 1987 to 1988 using 1987 as the base year.
d. Calculate Real GDP in 1987 using 1988 as the base year.
e. Calculate the percentage increase in Real GDP from 1987 to 1988 using 1988 as the base year.
Chapter 22: Unemployment, Inflation and Long-Run Growth

1. Classify the following as either employed, unemployed or not in the labor force.

An individual who has been

temporarily absent due to caring for an
elderly relative whether they are paid
or not.

A person 16 years old or older who

works without pay for 15 or more
hours per week in a family enterprise.

Someone who works for pay in his or

her own business.

A woman who spends five hours a

week sending bills to her husband's
clients. She is not paid for her work.
Otherwise she performs non-market
work at home.

A retired person

A person who quits one job in favor of

looking for work elsewhere but has
yet to find work.

2. You are an employee of the Bureau of Labor Statistics involved in the monthly survey of households
used to estimate the unemployment rate. In each of the following cases, classify the individual as
frictionally, structurally, or cyclically unemployed. Explain your classification.
(a) There has been a general economic slowdown. Because of weak demand, Andy Capp has lost
his portering job at the docks.
(b) Phil McCafferty, a newly qualified dental school graduate, is looking for a place to set up
practice.
(c) Coal miner Ned Ludd is thrown out of work by the introduction of a more mechanized
production process.
(d) Latosha Hogan, a computer programmer with a large bank, quit her job two months ago in
search of a better-paid programming position. She is still looking.
Chapter 23: Aggregate Expenditure and Equilibrium Output

1. Assume a two sector economy where C = $100 + .9Y and I = $50. Calculate the equilibrium level
of output for this hypothetical economy. What would the level of consumption be if the economy
were operating at 1400? What would be the amount of unplanned investment at this level? In which
direction would you expect the economy to move to at $1400 and why?

2. Assume consumption is represented by the following: C = 400 + .5Y. Also assume that planned
investment (I) equals 100.

(a) Given the information, calculate the equilibrium level of income.

(b) Given the information, calculate the level of consumption and saving that occurs at the
equilibrium level of income.
(c) Write out the saving function for this economy. What is the marginal propensity to save?

3. Assume that the saving function is S = - 100 + .1Y and planned investment is 40. Calculate the
equilibrium level of output using the leakages/injections approach. How much would output
contract by if planned investment fell by 10?

4. Assume the following saving function and investment function: S = -200 + .25Y and I = 25.
Calculate the equilibrium output level.