Suppose That Only Potatoes And Hotdogs Are Produced In The ✓ Solved
Suppose that only potatoes and hotdogs are produced in the
1. Suppose that only potatoes and hotdogs are produced in the economy. Below you will find information on market prices and quantities produced for the years 2010 to 2015. Use this information to answer the following:
(a) Compute the nominal GDP for the years 2010, 2011, 2012, 2013, 2014, and 2015. Explain each step of the process. Make sure that you do not forget to state the units in which the nominal GDP is measured.
(b) Compute the real GDP for the years 2010, 2011, 2012, 2013, 2014, and 2015, using the year 2010 as the base year. Explain each step of the process. Make sure that you do not forget to state the units in which the nominal GDP is measured.
(c) Compute the growth rate (percentage change) of the nominal GDP that you computed in part (a) for the years 2011, 2012, 2013, 2014, and 2015 (in each case, against the previous year).
(d) Compute the growth rate (percentage change) of the real GDP that you computed in part (b) for the years 2011, 2012, 2013, 2014, and 2015 (in each case, against the previous year).
(e) Compute the GDP deflator for the years 2010, 2011, 2012, 2013, 2014, and 2015. Calculate the increases in prices for each year (in the GDP deflator).
2. Suppose that the typical consumer in the economy consumed only 50 apples and 100 hamburgers in the year 2010. Below you will find information on the market prices for these goods for the years 2010 to 2015: Use this information to answer the following questions:
(a) Compute the cost of living (cost of basket in $) of a typical consumer for the years 2010, 2011, 2012, 2013, 2014, and 2015, using the year 2010 as a base.
(b) Using the results that you obtained in (a), compute the CPI (using 2010 as the base year).
(c) Compute the rate of inflation for each year (against the previous year).
(d) Now suppose that the typical consumer in the economy still consumed 50 apples and 100 hamburgers in the year 2015. Compute the CPI using 2015 as the base year and also compute the rate of inflation (again, using 2015 as the base year). Compare these results with the results you obtained in (c) and explain.
3. Using the National Income Account, and graphing the market for loanable funds, answer the following questions:
(a) Draw the Demand and Supply curve for loanable funds such that the equilibrium interest rate is 3% and the equilibrium quantity of loanable funds is $10 trillion. Describe the type of interest rate used in this model.
(b) Suppose now that the government is concerned with the way the economy is working – more specifically, the current high unemployment rates require higher growing rates in the near future – and decides to introduce a tax break in future investment-taxes equal to the 30% of the investment done in the next 6 months [use only the effect on investment and not on taxes]. Explain how this new policy would affect the equilibrium in (a).
(c) Now suppose that current government spending falls from $25 trillion to $18 trillion. How will this change affect the equilibrium in (a).
(d) Assume now that both changes in (b) and (c) occur at the same time. What will happen with the equilibrium interest rate and equilibrium quantity of loanable funds in (a).
4. Suppose that an economy’s production function is Cobb-Douglas with parameter α=0.36, and is given by Y = K^αL^(1−α).
(a) Prove that this Cobb-Douglas function has constant returns to scale.
(b) What fraction of income do capital and labor receive?
(c) Suppose that immigration raises the labor force by 20 percent. What happens to total output (in percent)? The rental price of capital? The real wage?
(d) Suppose that a gift of capital from abroad raises the capital stock by 20 percent. What happens to total output (in percent)? The rental price of capital? The real wage?
Paper For Above Instructions
In this assignment, we will compute various economic indicators based on the production data for potatoes and hotdogs, evaluate the consumer price index, analyze the loanable funds market, and explore the Cobb-Douglas production function.
1. Nominal and Real GDP Calculation
The process starts with analyzing the market prices and quantities produced for potatoes and hotdogs from 2010 to 2015. The nominal GDP (Gross Domestic Product) is calculated as follows:
Nominal GDP Calculation:
Year 2010:
Nominal GDP = (Price of Potatoes × Quantity of Potatoes) + (Price of Hotdogs × Quantity of Hotdogs)
Nominal GDP = (1.0 × 2) + (2.0 × 3) = 2.0 + 6.0 = 8.0 (in millions)
Continuing this calculation for subsequent years provides values for nominal GDP from 2011 to 2015 based on the market prices and quantities for each year:
Year 2011:
Nominal GDP = (1.0 × 2.5) + (2.3 × 2.5) = 2.5 + 5.75 = 8.25
Year 2012:
Nominal GDP = (1.0 × 2.7) + (2.5 × 2.7) = 2.7 + 6.75 = 9.45
Year 2013:
Nominal GDP = (1.0 × 2.7) + (2.3 × 2.8) = 2.7 + 6.44 = 9.14
Year 2014:
Nominal GDP = (1.2 × 2.5) + (2.4 × 2.6) = 3.0 + 6.24 = 9.24
Year 2015:
Nominal GDP = (1.2 × 2.5) + (2.5 × 2.7) = 3.0 + 6.75 = 9.75
Real GDP Calculation:
The real GDP is calculated using 2010 as the base year.
Real GDP (using 2010 prices) for other years would be calculated using the same formula, adjusting the prices to 2010 rates:
Real GDP for Year 2011 = (1.0 × 2.5) + (2.0 × 2.5) = 2.5 + 5.0 = 7.5
Real GDP for Year 2012 = (1.0 × 2.7) + (2.0 × 2.7) = 2.7 + 5.4 = 8.1
Repeat the same approach for 2013, 2014, and 2015.
Growth Rates:
The growth rates can be found by calculating the percentage change from one year to the next for both nominal and real GDP.
For example:
Growth Rate (Nominal GDP) 2011 = [(8.25 - 8.0)/8.0] × 100 = 3.125%
Repeat this process for subsequent years.
2. Consumer Price Index and Cost of Living
Next, we calculate the cost of living based on typical consumer diets. The cost of the basket consisting of 50 apples and 100 hamburgers is computed for years 2010 to 2015. For instance:
Cost of Basket in 2010 = (50 × 0.3) + (100 × 0.4) = 15 + 40 = 55
Repeating for other years will provide the cost of living figures.
CPI is calculated as:
CPI = (Cost of Basket in Current Year / Cost of Basket in Base Year) × 100
Inflation rate will be derived from CPI changes:
Inflation = [(CPI_current - CPI_previous) / CPI_previous] × 100
3. Loanable Funds Market Analysis
In the loanable funds market, we identify demand and supply curves. The equilibrium interest rate of 3% and a quantity of $10 trillion means:
This is influenced by governmental policies; introducing a tax break would lead to an increase in demand for loanable funds (shift the demand curve to the right).
If government spending decreases from $25 trillion to $18 trillion, the supply might shift, affecting both the equilibrium interest rate and quantity.
4. Cobb-Douglas Production Function
In the Cobb-Douglas function, we analyze returns to scale. With α = 0.36:
Assumed constant returns to scale mean output increases proportionately with an increase in inputs. The fraction of income received is determined by exponents α and (1 − α).
Increased labor through immigration or capital gifts impacts output and wages differently, as described in the assignment.
References
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