Economics 601

Workshop #1 Answer Key

Dustin Chambers

Fall 2014

Instructions: Please show all of your work. Turn-in one assignment per group,
and make sure to list the names of each student in your group. Tip: This
assignment can be solved very quickly using Microsoft Excel.
1.

Suppose that you work for the Bureau of Labor Statistics, and you want to
construct a College Student Price Index (CSPI) for college students. After
sending surveys to a large number of students, you determine that the
basket will consist of the following items:
o
o
o
o
o

Tuition
Lodging
Pizza
Beer
Gasoline

In December 2005, you send 10 surveys to randomly-selected students and ask

them how much they spend, on a pro-rata basis on each of these categories.
The responses are provided below:
Categories
Tuition
Lodging
Pizza
Beer
Gasoline

#1
457
362
229
3
109

#2
566
346
182
16
87

#3
544
342
230
97
81

Survey Respondent
#4
#5
#6
#7
428
523
469
541
314
362
323
384
218
211
192
211
34
48
54
17
117
81
99
80

#8
496
334
227
64
107

#9
443
301
228
7
113

#10
445
348
182
79
106

Each December, you also collect pricing information on the average price of
these items:
Categories
Tuition
Lodging
Pizza (large)
Beer (6-pack)
Gasoline (all-grade avg)

2005
500
330
10.00
5.00
1.82

Average Prices
2006
525
337
10.50
5.25
2.28

2007
557
347
11.00
6.00
2.38

Setting 2005 as your base year, 1) compute the College Student Price Index
(CSPI) for each year (i.e. 2005, 2006, and 2007), and 2) calculate the inflation
rate between 2005 and 2006, and between 2006 and 2007. Which expenditure
categories were most responsible for higher inflation as measured by the
percentage changes in the CSPI?

The important concept to remember is that the average quantities of tuition, lodging, pizza, beer,
and gasoline, while not explicitly given to you, are fixed in every year.
For example, computing the average expenditure on tuition equals:
10

Tuition

2005
i

i=1

10

457 + 566 + 544 + 428 + 523 + 469 + 541 + 496 + 443 + 445
= 491.20
10

You can express this average expenditure as the product of the average price of a unit of tuition
and the average quantity of units purchased:

Avg Tuition = Ptuition Qtuition

We already know the average expenditure on tuition for 2005 ($491.20) and the average price of
tuition in 2005 ($500), so we can easily derive the average quantity of tuition purchased (which
we will hold fixed in 2006 and 2007):

Avg Tuition = Ptuition Qtuition

491.20 = 500 Qtuition
Qtuition =

491.20
= 0.9824
500

Repeating this exercise for lodging, pizza, beer, and gasoline, we can derive our basket
quantities for the College Student Price Index (CSPI):
Average Basket Quantities
Tuition
0.9824
Lodging
1.0352
Pizza (large)
21.1000
Beer (6-pack)
8.3800
Gasoline (all-grade avg) 53.8462

Now we are in a position to calculate the College Student Price Index (CSPI) for each year. For
2005, we already know the average basket cost, which is simply the average of the survey
responses ($1,183.70). For 2006 and 2007, we simply multiply the average prices by the
average quantities and sum:
Avg.
Avg. 2006
Avg.
Categories Quantity
Prices
Exp.
Tuition
0.9824 x
525
= 515.76
Lodging
1.0352 x
337
= 348.86
Pizza
21.1 x
10.50
= 221.55
Beer
8.38 x
5.25
= 44.00
Gasoline
53.8462 x
2.28
= 122.77
Total >>>
1,252.94
Now, calculation of the CSPI is straightforward:

Avg.
Avg. 2007
Categories Quantity
Prices
Tuition
0.9824 x
557
Lodging
1.0352 x
347
Pizza
21.1 x
11.00
Beer
8.38 x
6.00
Gasoline
53.8462 x
2.38
Total >>>

=
=
=
=
=

Avg.
Exp.
547.20
359.21
232.10
50.28
128.15
1,316.95

Basket Cost in 2005

1,183.70
100 =
100 = 100
Basket Cost in base year
1,183.70
Basket Cost in 2006
1, 252.94
=
100 =
100 = 105.8
Basket Cost in base year
1,183.70
Basket Cost in 2007
1,316.95
=
100 =
100 = 111.3
Basket Cost in base year
1,183.70

CSPI 2005 =
CSPI 2006
CSPI 2007

Calculating the percentage change yields the inflation rate:

CSPI 2006 CSPI 2005

105.8 100
inflation 2006 =
100 =
100 = 5.8%
CSPI
100

2005

CSPI 2007 CSPI 2006

111.3 105.8
inflation 2007 =
100 =
100 = 5.2%
CSPI 2006
105.8

To calculate which expenditure categories are most responsible for the change in CSPI, first
calculate the percentage change in each price series:

Categories
Tuition
Lodging
Pizza (large)
Beer (6-pack)
Gasoline (all-grade avg)

%-change from
2005 to 2007
11.4%
5.2%
10.0%
20.0%
30.8%

Next, calculate each categories share of the baskets total expenditures in 2005, and weight the
percentage changes above by these weights:

Categories
Tuition
Lodging
Pizza (large)
Beer (6-pack)
Gasoline (all-grade avg)

%-change from
2005 to 2007
11.4%
5.2%
10.0%
20.0%
30.8%

x
x
x
x
x

expenditure
share (2005)
41.5%
28.9%
17.8%
3.5%
8.3%
Total >>>

=
=
=
=
=

4.7%
1.5%
1.8%
0.7%
2.6%
11.3%

Rank
1
4
3
5
2

2.

Lin
e
1
2
3
6
7
8
9
13
14
15
16
19
22
23
24
25
26

The following tables contain U.S. macroeconomic data from the Bureau of
Economic Analysis (BEA). Please fill-in the missing values and answer
the follow-up questions:
2003
Billions Fraction
Nominal of Total
Dollars
GDP
Gross domestic product 11,510.7
Personal consumption 7,765.5
expenditures
Goods 2,721.6
Services 5,044.0
Gross private domestic 2,027.9
investment
Fixed investment 2,008.7
Nonresidential 1,371.7
Residential
636.9
Change in private inventories
19.3
Net exports of goods and
-503.7
services
Exports 1,040.3
Imports 1,543.9
Government consumption 2,220.8
expenditures and gross
investment
Federal
824.8
National defense
519.9
Nondefense
304.9
State and local 1,396.0

2013
Billions Fraction
Nominal of Total
Dollars
GDP

100.0%
67.5%

16,768.1
11,484.3

100.0%
68.5%

23.6%
43.8%
17.6%

3,851.2
7,633.2
2,648.0

23.0%
45.5%
15.8%

17.5%
11.9%
5.5%
0.2%
-4.4%

2,573.9
2,054.0
519.9
74.1
-508.2

15.3%
12.2%
3.1%
0.4%
-3.0%

9.0%
13.4%
19.3%

2,262.2
2,770.4
3,143.9

13.5%
16.5%
18.7%

7.2%
4.5%
2.6%
12.1%

1,231.5
769.9
461.6
1,912.4

7.3%
4.6%
2.8%
11.4%

Which of the major expenditure categories (i.e. C, I, G, NX): 1) increased in size

(as a fraction of GDP) between 2003 and 2013, and 2) which categories
decreased in size (as a fraction of GDP) over the same time period. Do you
have any theories as to why this is so?
Consumption as a fraction of GDP increased, while the remaining major
components, net exports (in absolute terms), and government spending declined
as a fraction of GDP. The soft economy following the Great Recession probably
explains the declining value of I/Y, and NX/Y (along with more energy
independence and lower oil prices). Consumption appears to have risen due
great service expenditures, which is likely due to higher healthcare spending.

Continued: Please fill-in the missing values and answer the follow-up questions:
Billions of Dollars
2003
2013

Growth Rate (%)

Total Annualized

Line
1
2
3
6
7
8
9
13
14
15
16
19
22
23
24
25
26

Gross domestic product 11,510.7 16,768.1

Personal consumption 7,765.5 11,484.3
expenditures
Goods 2,721.6
3,851.2
Services 5,044.0
7,633.2
Gross private domestic 2,027.9
2,648.0
investment
Fixed investment 2,008.7
2,573.9
Nonresidential 1,371.7
2,054.0
Residential
636.9
519.9
Change in private
19.3
74.1
inventories
Net exports of goods and
-503.7
-508.2
services
Exports 1,040.3
2,262.2
Imports 1,543.9
2,770.4
Government consumption 2,220.8
3,143.9
expenditures and gross
investment
Federal
824.8
1,231.5
National defense
519.9
769.9
Nondefense
304.9
461.6
State and local 1,396.0
1,912.4

45.7%
47.9%

3.83%
3.99%

41.5%
51.3%
30.6%

3.53%
4.23%
2.70%

28.1%
49.7%
-18.4%
283.9%

2.51%
4.12%
-2.01%
14.40%

0.9%

0.09%

117.5%
79.4%
41.6%

8.08%
6.02%
3.54%

49.3%
48.1%
51.4%
37.0%

4.09%
4.00%
4.23%
3.20%

Which of the major expenditure categories (i.e. C, I, G, NX) experienced the

highest rates of growth? Which major expenditure categories experienced the
lowest rates of growth? How do these statistics mirror your findings from the
previous table?
Consumption grew the fastest (among the major categories), reflective of its
increase in relative size (C/Y). This data also reveals a sharp increase in
government spending, reflecting President Bushs and Obamas big government
fiscal policies.

Continued: Please fill-in the missing values and answer the follow-up questions:
Price Levels
(deflators)
2003
2013

inflation rate
total

annual

Line
1
2
3
6
7
8
9
13
14
15
16
19
22
23
24
25
26

Gross domestic product

Personal consumption
expenditures
Goods
Services
Gross private domestic
investment
Fixed investment
Nonresidential
Residential
Change in private inventories
Net exports of goods and
services
Exports
Imports
Government consumption
expenditures and gross
investment
Federal
National defense
Nondefense
State and local
Source: Table 1.1.4 Price
Indexes for GDP

86.735
87.572

106.7
107.3

23.1%
22.6%

2.1%
2.1%

93.703
84.533
87.841

106.2
107.9
103.6

13.3%
27.7%
18.0%

1.3%
2.5%
1.7%

87.734
89.885
85.549
-----

103.8
103.2
106.4
-----

18.3%
14.8%
24.4%
-----

1.7%
1.4%
2.2%
-----

87.786
84.512
80.341

112.0
113.5
108.6

27.6%
34.3%
35.2%

2.5%
3.0%
3.1%

84.773
84.475
85.297
77.761

107.5
107.3
108.0
109.4

26.8%
27.0%
26.6%
40.7%

2.4%
2.4%
2.4%
3.5%

Which of the major expenditure categories (i.e. C, I, G, NX) experienced the

highest rates of inflation? Which major expenditure categories experienced the
lowest rates of inflation? Do you have any theories/ideas to explain this?
The price of government expenditures saw the sharpest rise. Among the subcategories, there was relatively greater inflation in the consumption service
sector (which typically experiences higher than average inflation), residential
investment (probably a hang-over from the housing bubble), and exports and
imports (oil).

3.

An economy has two firms. Households own all of the labor services and
all of the capital, which they rent out to the firms. Firm A produces sugar
using labor services worth $10 and capital services worth $20. It sells $15
worth of sugar to households and $15 of sugar to firm B; a bakery. The
bakery produces cakes worth $60 that it sells directly to households.
Households earn $30 in wages from firm A and B combined.
(a) What is the value of GDP in this economy?
(b) What is the value added by firm A?
(c) What is the value added by firm B?
(d) How much does the household earn in profit from firms A and B
combined?
(e) What is the total value of intermediate goods produced in this
economy?

(a) GDP = Market value of all final goods & services = $15 sugar + $60 cakes = $75
(b) Firm A transformed $0 of intermediate goods $30 sugar, so the VA = $30.
Alternatively, we could have used the formula: VA = wages + rents + profits. [Note:
economic profits = payments to capital + accounting profits.] Firm A paid $10 in wages,
$0 in rents (rents are payments to land owners), and $20 in capital payments (profits =
$20 because there are no accounting profits).
VA = $10 + $0 + $20 = $30
(c) Firm B transformed $15 worth of sugar into $60 worth of cakes, thus VA = $45.
Alternatively, we could have used the formula: VA = wages + rents + profits. Firm B paid
$20 in wages, $0 in rents (rents are payments to land owners), and $0 in capital
payments but earned $25 in accounting profits (economic profits = $25).
VA = $20 + $0 + $25 = $45
(d) We know that from an economy-wide perspective, Y = VA, and VA = total wages +
total rents + total profits. Therefore, for the entire economy:
Total profits = Y Total Wages Total Rents = $75 $30 $0 = $45
(e) The only intermediate goods consisted of the $15 worth of sugar produced by Firm A
and sold to Firm B.