Econ1102 Macroeconomics 1

Tutorial Questions
Tutorial No. 1
Week 1-5 August
Textbook Reference: BOF: Chapter 1: (Output and Prices)
Main Concepts
Gross domestic product (GDP)
Value-added
GDP and economic welfare
Price level and Inflation
Consumer price index (CPI)
Costs of inflation
Nominal and real interest rates
Fisher effect
Question 1
(i)What are the three ways of measuring GDP? Explain why each method for measuring
GDP will give the same answer (aside from measurement errors).
(ii)Which of the following items would be included in (current) GDP?
(a)You purchase a second-hand copy of the BOF textbook
(b)Max Brenner purchases a new hot chocolate machine
(c)You buy a new Nesspresso coffee machine
(d)Max Brenner purchases a weeks worth of chocolate
(e)You buy a weeks worth of chocolate
(f)You buy a copy of Thomas Pikettys Capital from US Amazon
Question 2
The following are some data for an economy. Calculate C, I, G, NX and GDP.
Sales of existing houses and units
200
Exports
75
Imports
50
Public demand
200
Household consumption expenditure
500
Business fixed investment
200
Government interest payments
50
GST revenue
400
Private construction of new housing
100
Beginning-of-year inventory stocks
100
End-of-year inventory stocks
75

Question 3
YEAR
1

GOOD
Apples
Bananas
Computers
Apples
Bananas
Computers

PRICE
$4/kg
$2/kg
$2,000
$6/kg
$3/kg
$2,000

QUANTITY
500kg
250kg
3
300kg
400kg
5

(i)Calculate nominal GDP for year 1 and year 2. What is the growth rate of nominal GDP?
(ii)Calculate real GDP using first (a) year 1 prices and then using (b) year 2 prices. For
each set of prices calculate the growth rate of real GDP. What do you notice about the
growth rates?
(iii)One solution to the result in (ii) is to take an average of the two growth rates and use
that to calculate real GDP. If you apply this strategy to the above data, and treat year 1
as the base-year (in the base-year nominal GDP equals real GDP), what is the dollar
value of real GDP in year 2?
Question 4
(i)Explain why per-capita GDP may not be an accurate measure of economic welfare.
Identify some factors that are likely to have an impact on economic welfare but are not
measured in GDP.
(ii)What are some of the alternatives to GDP that have been proposed to measure a
countrys economic progress?
Question 5
Consider the following information on Steves consumption basket. (He only consumes
three goods).
Good
Yearly
2011 Prices
2012 Prices
2013 Prices
purchase (no.)
iPad (16 GB)
1
500
500
500
Hamburger
200
5
5.5
6
Pepsi
100
2.5
2
3
(i)Calculate an annual cost of living index for Steve.
(ii)If Steves consumption basket is typical (or representative) for the entire economy,
calculate the inflation rate for 2012 and 2013.

(iii)Based on Steves consumption basket, is measured inflation likely to over- or understate the true change in the cost of living? Explain you reasoning.
Question 6
In the textbook BOF identify six costs associated with inflation.
(i)Which of the costs are most likely to arise with unanticipated or unexpected changes
in the rate of inflation?
(ii)Are there any costs to inflation if future rates of inflation are perfectly anticipated?
For example suppose the RBA were able to keep annual inflation at 2.5 percent from
now on into the indefinite future.