ECON2003, 2nd sem, 2023-24

The 1st Assignment of Principle of Macroeconomics

Question 1 (25 marks total) Part A:

The above table gives data for a small economy Alpha. Answer the following questions based on the data provided.

a)   Calculate GDP for this economy using the expenditure method. (6 marks)

b)  Gross National Product (GNP) is the total income earned by permanent residents of an economy, including capital and labor. It considers the income earned by citizens abroad and excludes the income earned by foreigners in the country. You are required to calculate the value of Alpha’s GNP and determine whether Alpha’s GDP differs from its GNP. If it does, please explain the reason for this difference based on the data provided.  (7 marks)

Part B:

Determine the effect on economy Beta’s GDP and  for each of the following scenarios. Explain your answers. (2 marks each, 12 marks total)

a)  A tourist spends on a buffet at a restaurant in Beta.

b)  A household switches from buying pre-made steak and cheese hamburgers for a family dinner (which would have cost £25) to buying the raw ingredients (which cost only £9) and making the same steak and cheese hamburgers at home.

c)  A domestic electronic store that imports computers from a foreign economy at the cost of £800 per piece and sells them to students at £1,100 per piece.

d)  A foreign worker finds a job and earns a living in Beta.

e)  A young woman inherited an old house from her grandfather through a transfer.

f)   A famous movie star marries her hairdresser, whom she formerly paid £70,000 ayear.   After they are married, her husband continues to provide hairdressing services to her as before, and she continues supporting him as a wife without a regular salary.

Question 2 (25 marks total)

Consider an economy which produces only two goods, Coffee and orange. The prices and quantities produced in 2022-2024 are as follows.

Coffee                                                         Orange

a)    Using a method similar to the CPI, compute the percentage change in the overall price level of the two products from 2023 to 2024. Use 2022 as the base year and fix the consumption basket of the representative consumer at 3 boxes of coffee and 5 boxes of orange. (5 points)

b)    Using a method similar to the GDP deflator, compute the percentage change in the overall price level from 2023 to 2024. Again, use 2022 as the base year. (5 points)

c)    Is the inflation rate in 2024 the same using the two methods? Explain why or why not. (3 points)

d)    If, due to use of chemical fertilizers on the land, the taste of the oranges is not as good in 2024 as in the past, how does this information affect your opinion regarding the accuracy of the calculations above as measures of cost of living? Explain. (4 points)

e)    If the representative consumer would rationally adjust their consumption bundles in response to the price changes, how is the real increase of consumers’ living cost comparing to the inflation rate calculated in a)? Explain (3 points)

f)     Suppose George’s monthly nominal wage increases from RMB30,000 in 2023 to RMB35,000 in 2024. What is his wage in 2024 in terms of the 2023 RMB if we use the overall price level calculated in question a)? Does his purchasing power increase or decrease, and by how much? (5 points)

Question 3 (25 marks total)

You have the following data about the Chinese economy>

Y: China’s GDP at 2015 prices (billion USD); L: China’s labor force (10000 workers); K: China’s Capital Stock at 2017 prices (billion USD); Z: estimated proportion of population with higher education.

a) Find the output per worker (Y/L) of China from 2004 to 2022. (3 marks)

b) Compute the growth rates of Y and Y/L of the Chinese economy from 2005 to 2022. Briefly describe and compare the trends of Y and Y/L. (6 marks)

c) Use the production function  to discuss how changes in  and affect China’s productivity (Y/L) between 2004 and 2022. (6 marks)

(The next two parts, d) and e), are open-ended questions. Keep the word-count of your

answers to d) AND e) within 300 words in total. You may use any relevant information and data you can find to support your argument.)

d) The one-child policy was introduced in 1980 to slow population growth. The labor force  started to shrink in 2016. Since 2015, the one-child policy had been gradually relaxed. In 2021, all restrictions are removed and someplaces even offer financial incentives to

encourage individuals to have more children. Discuss how these policies can change the productivity. Do you think that these policies are effective? (6 marks)

e) From the equation , discuss any possible change in A and N in that period that can affect the productivity of labor.  (4 marks)

Question 4 (25 marks total)

The loanable funds market of a closed economy is described by the following equations: LP=900-50xr  and  LS=300+30xr ,

where L, and LS are the quantities of loanable fund demanded and supplied respectively; all monetary amounts are in billion dollars; andris the interest rate (for example, if interest rate were said to be 4%, the r in these equations would ber=4 ). You also know about this

economy that their government spending is $200 billion, tax collected (T) is $300 billion.

a)  Assume the market is in equilibrium. Find the interest rate, the investment, the national savings, the private savings, and the public savings. (5 marks)

b)  Alternative to the above, suppose the government sets an interest rate ceiling at 5%, what are the investment, national savings, private savings, and public savings? (4 marks)

c)  Alternative to the above, suppose government 1% interest rate subsidy. For example, when a firm borrows at 5% form. the loanable funds market, government provides 1% subsidy so that the firm only pays 4%. And the government does not collect extra tax to balance the budget. Re-do Part a) under these alternative conditions (hint: there need to  be two interest rates, one paid, one received.) (6 marks)

d)  The “investment” above may also be referred to as “private investment”, for they are made by private firms and households. Government may also invest, typically on infrastructures; such is called “public investment” . Suppose the same situation as given before Part a), except that the government uses all public saving on public investment. Find equilibrium interest rate, private investment, public investment, private savings and public savings. (6 marks)

e)  Among three situations in b), c) and d), which one do you think is the best in terms of improving productivity? Explain. (Public investment can be assumed to be zero in b) and c).)  (4 marks)