EC 1301 Principles of Economics Sem 1 AY 2017/18 – LY Mun

EC1301 Tutorial 6 (Week 9)

Q1. For each of the following, explain whether the transaction would be counted in China’s
GDP for 2016, and explain why it should or should not be counted.

a. A Chery QQ manufactured in China in June. 2015 and sold to a domestic household

in March. 2016.
Answer
Chery QQ was produced in 2015, it should not be included in 2016 GDP. (It was
counted as part of inventories held by the manufacturer at the end of 2015 and so
counted as part of investment. In 2016, it’s value included in household consumption
spending but a matching value is subtracted from inventory investment so that it nets
out and does not contribute to 2016 GDP.)

b. The social security that a retiree living in Shanghai receives in 2016.

Answer
This is simply a financial transfer and does not present a payment for any currently
produced good or service.

c. Mr. Zhang buys 1000 shares of Bank of China stock at 3.65RMB per share, paying
his domestic stockbroker a 0.30% commission.
Answer
The commission of 0.30%*1000*3.65=10.95 RMB, is the value is of the stock
broking services, and enters into GDP as consumption. The rest of the transaction
involves buying and selling of a financial asset, which is not included in GDP.

Q2. Imagine that an economy, Antoinette, that produces only two goods: cakes and wine.
The following figures describes the economy of Antoinette in 1790 and 1791:

1790 (Base year) 1791

Number of cakes produced 20000 25000
Bottles of wine produced 15000 20000
Price of each cake in $ $2 $3
Price of each bottle of wine in $ $5 $6
Population 100 150

a. Calculate the nominal GDP in 1790 and 1791.

b. Calculate the real GDP in 1790 and 1791.
c. How has the nominal GDP changed from 1790 to 1791?
d. How has the real GDP changed from 1790 to 1791?
e. Calculate Antoinette’s real GDP per capita for 1790 and 1791.
f. How has Antoinette’s standard of living, as measured by real GDP per capita, changed
from 1790 to 1791?

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EC 1301 Principles of Economics Sem 1 AY 2017/18 – LY Mun

Answer:
1790 (Base year) 1791
Number of cakes produced 20000 25000
Bottles of wine produced 15000 20000
Price of each cake in $ $2 $3
Price of each bottle of wine in $ $5 $6
Population 100 150
a. Nominal GDP in $ =20000*2+15000*5 =25000*3+20000*6
115000 195000
b. Real GDP in 1790 $ 115000 =25000*2+20000*5
150000
c. Percentage change in nominal GDP =(195000-115000)/115000*100
69.6
d. Percentage change in real GDP =(150000-115000)/115000*100
30.4
e. Real GDP per capita =115000/100 =150000/150
1150 1000
f. Percentage change in real GDP per capita =(1000-1150)/1150*100
-13.0

Q3. Explains what happens to the unemployment rate (U3) and the employment-population
ratio in each of the following scenarios.

a. A manufacturing company shifts its operations to a cheaper location in another country,

and lays off its workers, who immediately start looking for new jobs.
Answer:
Unemployed
𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑒 𝑈3 = × 100%
Labor force
Employed
𝐸𝑃𝑅 = × 100%
Able to work
Unemployment rate will rise (numerator increases, but denominator is unchanged),
and EPR will fall (numerator decreases, but denominator is unchanged).

b. After an unsuccessful search, some of the laid-off workers became discouraged and quit
looking for a job. How will the unemployment rate and EPR change relative to your
answer in part a?
Answer: Unemployment rate will fall from part (a) and EPR will remain the same as
part (a)
c. Numerous students graduate from college but cannot find work.
Answer: Unemployment rate will rise and EPR will remain unchanged.