1. (a)       Average labor productivity is output divided by employment:

      2008: 12,000 tons of potatoes divided by 1000 workers = 12 tons of potatoes per worker

      2009: 14,300 tons of potatoes divided by 1100 workers = 13 tons of potatoes per worker

        (b)  The growth rate of average labor productivity is [(13/12) - 1] ´ 100% = 8.33%.

        (c)  The unemployment rate is:

2008: (100 unemployed/1100 workers) ´ 100% = 9.1%

2009: (50 unemployed/1150 workers) ´ 100% = 4.3%

        (d)  The inflation rate is [(2.5/2) - 1] ´ 100% = 25%.

 2.   Just because prices were lower in 1890 than they were in 2009 does not mean that people were better off back then. People’s incomes have risen much faster than prices have risen over the last 100 years, so they are better off today in terms of real income.

3.     Given data: I = 40, G = 30, GNP = 200, CA = -20 = NX + NFP, T = 60, TR = 25, INT = 15, NFP = 7 - 9 = -2. Since GDP = GNP - NFP, GDP = 200 - (-2) = 202 = Y.
Since NX + NFP = CA, NX = CA - NFP = -20 - (-2) = -18. Since Y = C + I + G + NX, C = Y - (I + G + NX) = 202 - (40 + 30 + (-18)) = 150.

        S_pvt = (Y + NFP - T + TR + INT) - C = (202 + (-2) - 60 + 25 + 15) -150 = 30. S_govt = (T - TR - INT) - G = (60 - 25 - 15) - 30 = -10. S = S_pvt + S_govt = 30 + (-10) = 20.

(a)  Consumption = 150

(b)  Net exports = -18

(c)  GDP = 202

(d)  Net factor payments from abroad = -2

(e)  Private saving = 30

(f)  Government saving = -10

(g)  National saving = 20

4.    

(a)  Nominal GDP is just the dollar value of production in a year at prices in that year. Nominal GDP is $56 thousand in the base year and $200 thousand in the current year. Nominal GDP grew 257% between the base year and the current year: [($200,000/$56,000) - 1] ´ 100% = 257%.

(b)  Real GDP is calculated by finding the value of production in each year at base-year prices.
Thus, from the table above, real GDP is $56,000 in the base year and $178,000 in the current year. In percentage terms, real GDP increases from the base year to the current year by

[($178,000/$56,000) - 1] ´ 100% = 218%.

(c)  The GDP deflator is the ratio of nominal GDP to real GDP. In the base year, nominal GDP equals real GDP, so the GDP deflator is 1. In the current year, the GDP deflator is $200,000/$178,000 = 1.124. Thus the GDP deflator changes by [(1.124/1) - 1] ´ 100% = 12.4% from the base year to the current year.

(d)  Nominal GDP rose 257%, prices rose 12.4%, and real GDP rose 218%, so most of the increase
in nominal GDP is because of the increase in real output, not prices. Notice that the quantity of oranges quadrupled and the quantity of bananas more than doubled.

5.     The key to this question is that real GDP is not the same thing as well-being. People may be better off even if real GDP is lower; for example, this may occur because the improvement in the health of workers is more valuable to society than the loss of GDP due to the regulation. Ideally, we would like to be able to compare the costs and benefits of such regulations; they should be put in place if the overall costs (the reduced GDP in this case) are valued less than the overall benefits (the workers’ health).

6.     (a)  The problem in a planned economy is that prices do not measure market value. When the price
of an item is too low, then goods are really more expensive than their listed price suggests—we should include in their market value the value of time spent by consumers waiting to make purchases. Because the item’s value exceeds its cost, measured GDP is too low.

              When the price of an item is too high, goods stocked on the shelves may be valued too highly. This results in an overvaluation of firms’ inventories, so that measured GDP is too high.

              A possible strategy for dealing with this problem is to have GDP analysts estimate what the market price should be (perhaps by looking at prices of the same goods in market economies) and use this “shadow” price in the GDP calculations.

(b)  The goods and services that people produce at home are not counted in the GDP figures because they are not sold on the market, making their value difficult to measure. One way to do it might be to look at the standard of living relative to a market economy, and estimate what income it would take in a market economy to support that standard of living.

  7.   (a) 

(b)  P = $5.

              (1)  W = $38. Hire one worker, since MRPN ($40) is greater than W ($38) at N = 1. Do not hire two workers, since MRPN ($35) is less than W ($38) at N = 2.

              (2)  W = $27. Hire three workers, since MRPN ($30) is greater than W ($27) at N = 3. Do not hire four workers, since MRPN ($25) is less than W ($27) at N = 4.

              (3)  W = $22. Hire four workers, since MRPN ($25) is greater than W ($22) at N = 4. Do not hire five workers, since MRPN ($20) is less than W ($22) at N = 5.

(c)  Figure 1 plots the relationship between labor demand and the nominal wage. This graph is different from a real labor demand curve because a labor demand curve shows the relationship between labor demand and the real wage. Figure 2 shows the real labor demand curve.

(d)  P = $10. The table in part a shows the MRPN for each N. At W = $38, the firm should hire five workers. MRPN ($40) is greater than W ($38) at N = 5. The firm shouldn’t hire six workers, since MRPN ($30) is less than W ($38) at N = 6. With five workers, output is 30 widgets, compared to 8 widgets in part a when the firm hired only one worker. So the increase in the price of the product increases the firm’s labor demand and output.

(e)  If output doubles, MPN doubles, so MRPN doubles. The MRPN is the same as it was in part d when the price doubled. So labor demand is the same as it was in part d. But the output produced by five workers now doubles to 60 widgets.

(f)  Since MRPN = P ´ MPN, then a doubling of either P or MPN leads to a doubling of MRPN. Since labor demand is chosen by setting MRPN equal to W, the choice is the same, whether
P doubles or MPN doubles.