Econ 105

Week 3
Tutorial 1

Q.1 Explain carefully what has happened to the CPI to justify each of the following newspaper
headlines.

a) “Prices on the rise again after a year of stability.”

CPI has been constant for a year and then rising.
b) “Inflation increases for three successive months.”
The rate of increase in the CPI has itself been increasing over the last three months.
c) “Finance minister pleased at moderation in inflation rate.”
The rate of increase in the price level (the inflation rate) has been falling in recent months.
But so long as the inflation rate remains positive, the price level continues to increase.
d) “Cost of living increases devastating pensioners.”
The CPI has been increasing, presumably the rate of increase is quite high to justify use of the
word “devastating”.

CPI = price of the basket of goods in current year times 100%s

Price of the basket of goods
- compare quantity bought against different prices (compare against base year quantity)

Q.2 Evaluate the following statements about unemployment (U divided by L times by 100%).

a) “Unemployment is a personal tragedy and a national waste.”

When there is a major long-term unemployment then personal tragedy (eg: violence, divorce,
alcoholism) can be involved as the more recent statistics shows, there is waste insofar as
persons who are productive (in the labour force) are without work.

b) “No one needs to be unemployed these days; just look at the Help Wanted ads in the
newspapers and the signs in the stores.”
Almost any unemployed person selected at random could find some job since there are always
vacancies for many unskilled jobs due to large labour turnover in such jobs However
questions arises: what one means by UNEMPLOYMENT:
 it is highly skilled engineer would be considered as unemployed if he/she rejects the job of
a dishwasher with an expectation to regain his/her previous job
 What is true for one person may not be true for everybody in the group.

During recessions,
Total # of unemployed > total number of job vacancies
 thus everyone could not find a job even if they seem willing to accept anything that was.
Q.3 Consider a 10-year period over which output per worker falls, but GDP increases. How can
this happen? Do you think this is likely to be good for the economy?

Output per worker = GDP divided by L = output/number of workers

Algebraically: this can happen if L is rising faster than GDP

Economic explanation: In the absense of technological change this outcome reflect the
diminishing output(?) of labour. Over a ten year period, this is probably only possible if the
rate of technical progress is small or if the rate of increase in the factors of production
(especially capital) is small.

Q.4 The list below provides some national income figures for the country of Econoland. All
figures are in millions of dollars.

Wage and salaries 5000

Interest income 200
Personal consumption 3900
Personal saving 1100
Personal income taxes 175
Subsidies 30
Government purchases 1000
Exports 350
Imports 390
Net private investment 950
Depreciation 150

In the textbook chpt 20 Q1

a) Using the expenditure approach, what is the value of GDP for Econoland?
GDP = sum of all goods of goods and services, express in terms of money
- expenditure = C + I + G + NX (X[export] minus M[import])
 PC (3900) + [NPI (950) + D (150)] + GP (1000) + (X minus M = 350 minus 390) =
5960 million
- does not include the 30 in expenditure because it is already included in GP  double
counting if include it again

b) Using the income approach, what is the value of GDP?

GDP = wages + salaries (household incomes) + interest + Business Profit + (Indirect Sales
minus Subsidies)
= 5000 + 200 + 465 + (135-30) + 150 = $5960 million

c) What is the value of net domestic income at factor cost?