Unit I: Main Macroeconomic Indicators

Additional Problem Set.

QUESTION 1: Place each of the following transactions in one of the four components of
expenditure: consumption, investment, government purchases, and net exports.

a. Boeing sells an airplane to the Air Force.

This is a sale to the U.S. government, so it falls under government purchases (G)

b. Boeing sells an airplane to American Airlines.

Since it's a sale to a business for the purpose of future production (investment in new capital),
this falls under investment (I).

L'avion acheté par American Airlines ne sera pas utilisé pour la consommation. Au lieu de cela, American Airlines utilise cet avion dans
son activité commerciale — pour transporter des passagers ou des marchandises, ce qui lui permettra de générer des revenus à l'avenir. Dans
l'économie, cela correspond à un investissement. Un investissement signifie généralement l'achat de biens ou d'équipements qui seront
utilisés pour produire d'autres biens ou services dans le futur.

c. Boeing sells an airplane to Air France.

This is a sale to a foreign buyer, so it counts as an export. Exports are part of net exports
(NX).

d. Boeing sells an airplane to Amelia Earhart.

This is a sale to a private individual (consumption by a household), so it goes
under consumption (C).

e. Boeing builds an airplane to be sold next year.

Since the airplane is not sold yet and remains in inventory, this counts as inventory
investment (a part of investment (I)).

QUESTION 2: Which of the following are included in GDP, and which are not?
a. The rise in life expectancy over time NO
Not included: GDP measures the monetary value of goods and services produced in a country, but it does not
account for non-economic factors such as improvements in life expectancy, quality of life, or well-being
directly.
b. Childcare provided by a licensed day care center YES
Included: This is a market transaction where services (childcare) are provided for payment. Since it's a paid
service, it's part of GDP under consumption.
c. Childcare provided by a grandmother NO
Not included: This is an informal service, and since no money is exchanged, it is not counted in GDP. Non-market
activities, even though they provide value, are excluded.
d. A used car sale NO
Not included: GDP only includes the sale of new goods and services.
e. A new car sale YES
Included: The sale of a new car is a market transaction of a newly produced good, so it is included in GDP
under consumption (if bought by a household) or investment (if bought by a business).
f. All varieties of cheese available in supermarkets YES
Included: The sale of cheese is a market transaction involving a finished product. Each time cheese is sold, it is
included in GDP as part of consumption.
g. The iron that goes into the steel that goes into a refrigerator bought by a
consumer. NO
Not included separately: The iron and steel are intermediate goods used in the production of the refrigerator. GDP only
counts the value of the final product (the refrigerator), not the individual components, to avoid double-counting.
QUESTION 3:
A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat
into flour and then sells the flour to a baker for $3.00. The baker uses the flour to make
bread and sells the bread to an engineer for $6.00. The engineer eats the bread. What is the
value added by each person? What is the value of GDP?

VA1=1-0=1, VA2=3-1=2. VA3=6-3=3.

GDP=1+2+3=6. It s the sum of the value added

QUESTION:4
Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each,
and Abby buys 10 red apples. In year 2, red apples cost $2, green apples cost $1, and Abby
buys 10 green apples.

a) Compute a consumer price index for apples for each year. Assume that year 1 is the base year
in which the consumer basket is fixed. How does your index change from year 1 to year 2?

Info:

Green
apples Red apples
year Q P Q P
1 0 2 10 1
2 10 1 0 2

Cost of the fixed basket in year 1:

 Red apples: 10 apples×1 dollar per apple=10

 Green apples: 0 apples×2 dollars per apple=0
 Total cost of living in year 1 = 10 dollars.

Year 2 :
We calculate the cost of living in year 2, but using the same quantities as in the base year (10 red
apples and 0 green apples):

 Red apples: 10 apples×2 dollars per apple=20

 Green apples: 0 apples×1 dollar per apple=0
 Total cost of living in year 2 = 20 dollars.

We calculate the CPI at years 1 and 2:

CPI1=10/10=1, CPI2=20/10=2

b) Inflation rate (in percentage) in year 2 is:

CPI 2−CPI 1 2−1

π 2= 100= 100=100 %
CPI 1 1
Interpretation:

The inflation rate between year 1 and year 2 is 100%, meaning that the overall price level of apples
(the fixed basket of apples) doubled from year 1 to year 2. Prices increased by 100%, reflecting a
significant rise in the cost of apples during this period.

QUESTION 5:
An economy has 100 people divided among the following groups: 25 have full-time jobs, 20 have one
part time jobs, 5 have two part time jobs, 10 would like to work and are looking for jobs, 10 would
like to work but are so discouraged that have given up looking for a job, 10 are running their own
business, 10 are retired and 10 are kids.

a. Calculate the number of unemployed and the labor force participation rate.

a) U=10
N=25+20+5+10=60
L=U+N=70,
Inactive Pop (retired, kids and unemployed)= 30.

Labor force participation rate (in percentage):

L 70 70
Participation rate= 100= 100= 100=87.5 %
Working age 100−20 80
population

b) Calculate the number of unemployed and the unemployment rate.

Unemployment rate (in percentage):

U 10
u= 100= 100=14.3 %
L 70

QUESTION 6:
Last year, a small nation with abundant forests cut down $200 worth of trees. It then turned $100
worth of trees into $150 worth of lumber. It used $100 worth of that lumber to produce $250 worth of
bookshelves. Assuming the country produces no other outputs, and there are no other inputs used in
producing trees, lumber, and bookshelves, what is this nation's GDP? In other words, what is the
value of the final goods the nation produced including trees, lumber and bookshelves? (Hint: assume
that the trees and lumber not used as intermediate good are sold as final good).

Breakdown of the production:

1. Trees:
o $200 worth of trees were cut down.
o Of this, $100 worth of trees were used as an intermediate good to make lumber.
o The remaining $100 worth of trees were sold as final goods.
So, the value of trees as final goods = $100.

2. Lumber:
o $150 worth of lumber was produced.
 o Of this, $100 worth of lumber was used as an intermediate good to make
bookshelves.
o The remaining $50 worth of lumber was sold as final goods.
So, the value of lumber as final goods = $50.

3. Bookshelves:
o $250 worth of bookshelves was produced and sold as final goods.

So, the value of bookshelves as final goods = $250.

GDP=250+50+100=400

QUESTION 7 : Using data from the Table 1 below, how much of the nominal GDP growth in the US
from 1980 to 1990 was real GDP and how much was inflation?

Table 1: Nominal GDP and GDP deflator in the US

Source: World Development Indicators, World Bank.

Nominal GDP GDP Deflator (2015

Year
(billions of dollars) = 1)

1980 2,857.30 0.403

1985 4,339.00 0.521
1990 5,963.10 0.607
1995 7,639.70 0.686
2000 10,251.00 0.745
2005 13,039.20 0.836
2010 15,049.00 0.919
2015 18,206.00 1.000
2020 20,893.70 1.085

1)We calculate the change in nominal GDP from 1980 to 2020:

20,893.70−2,857.30
Growth rate( 1980−2020)= 100=631.24 %
2,857.30

2)We calculate the inflation rate between 1980 and 2020 using the GDP deflator:

1.085−0.403
Inflation rate(1980−2020)= 100=169.23 %
0.403

Out of the 631.24% increase of nominal GDP, 169.23% is due to increase in prices and the rest,
631.24%-169.23%=462.01% is due to the increase in production or real GDP.

QUESTION 7
A country with a population of eight million adults (out of which 7 are working age) has five million
employed, 500,000 unemployed, and the rest of the adult population is out of the labor force.

a. What’s the unemployment rate? What share of population is in the labor force? What is
the labor force participation rate?

u=0.5/5.5=0.91 (9.1%)
 share of population in the labor force=5.5/8=0.6875 (68.75%)
labor force participation rate=5.5/7=0.786 (78.6%).

b. Compute the same: unemployment rate, percent of population in the labor force and the
unemployment rate using the real data contained in Table 2.

Table 2: Labor market data in Spain, Ital, Portugal, Germany and France for 2022
Source: World Development Indicators, World Bank.
Spain Italy Portugal Germany France
Population ages 15-64,
millions 31.5 37.4 6.7 53.3 41.6
Population, millions 47.8 58.9 10.4 83.8 68.0
Unemployment, millions 3.1 2.1 0.3 1.4 2.3
Labor force, millions 23.8 25.5 5.3 44.4 31.7

Spain Italy Portugal Germany France

Population ages 15-64, millions 31.5 37.4 6.7 53.3 41.6
Population, millions 47.8 58.9 10.4 83.8 68
Unemployment, millions 3.1 2.1 0.3 1.4 2.3
Labor force, millions 23.8 25.5 5.3 44.4 31.7
u (%) 13.03 8.24 5.66 3.15 7.26
Share of population in the labor
force (%) 49.8 43.3 51.0 53.0 46.6
Labor force participation rate (%) 75.6 68.2 79.1 83.3 76.2

Question 8 :Table 3 shows the fruit prices that the typical college student purchased from 2001 to
2004. What is the amount spent each year on the “basket” of fruit with the quantities shown in column
2?

Table 3: Example of calculation of CPI

Here’ we do ,
10*0,5 + 12*0,2 + 2*0,65 + 1*2 = 10,7
(2015) (2016) (2017) (2018)
Items Quantity
Price ($) Price ($) Price ($) Price ($)
Apples 10 0.5 0.75 0.85 0.88
Bananas 12 0.2 0.25 0.25 0.29
Grapes 2 0.65 0.7 0.9 0.95

Raspberries 1 2 1.9 2.05 2.13

a. Construct the consumer price index for a “fruit basket” in each year using 2015 as the base year.
b. Compute the inflation rate for fruit prices from 2016 to 2018.

8. a) b)
(2015) (2016) (2017) (2018)
Items Quantity
Price ($) Price ($) Price ($) Price ($)
Apples 10 0.5 0.75 0.85 0.88
 Bananas 12 0.2 0.25 0.25 0.29
Grapes 2 0.65 0.7 0.9 0.95

Raspberries 1 2 1.9 2.05 2.13

Cost of
living 10.7 13.8 15.35 16.31
CPI 100 129 143 152
Inflation
rate 28.97 11.23 6.25

QUESTION 9
Rosalie the Retiree knows that when she retires in 16 years, her company will give her a one-time
payment of $20,000. However, if the inflation rate is 6% per year, how much buying power will that
$20,000 have when measured in today’s dollars? Hint: Start by calculating the rise in the price level
over the 16 years.

Étape 1 : Calcul de l'augmentation du niveau des prix sur 16 ans

Pour estimer la hausse du niveau des prix sur une période de 16 ans, nous utilisons la formule
suivante pour calculer l'indice des prix (CPI) :

CPI16=(1+0.06)^16= 0,24
CPI *100 = 240 ( ici les prix on plus que doubler )

 Ce calcul donne une valeur qui représente combien le niveau des prix a augmenté par rapport
à l'année de base (année 1).

Cela signifie que, dans 16 ans, les prix auront environ doublé (augmenté de 140 % par rapport à
aujourd'hui).

Étape 3 : Calcul du CPI pour la base t=16

 Pour transformer la valeur future (20 000 $ dans 16 ans) en termes de prix d'aujourd'hui, nous
devons inverser le CPI. Cela se fait en prenant l'inverse du CPI à 16 ans :

CPI1 = 1/ CPI16 = 1/2,4 = 0,4167

Étape 4 : Ajustement du montant de 20 000 $

 Pour trouver combien d'argent Rosalie aura en termes de pouvoir d'achat d'aujourd'hui, nous
divisons le montant futur par l'indice des prix calculé pour 16 ans :

Montant ajusteˊ= 20,000/ 0.4167 ≈ 48,000

Ainsi, Rosalie aura environ 48 000 $ en pouvoir d'achat d'aujourd'hui, ce qui signifie que la somme de
20 000 $ dans 16 ans équivaudra à environ 48 000 $ en termes de pouvoir d'achat actuel.
QUESTION 10:
The total price of purchasing a basket of goods in the United Kingdom over four years is: year
1=£940, year 2=£970, year 3=£1000, and year 4=£1070. Calculate two price indices, one using year 1
as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100).

Then, calculate the inflation rate based on the first price index. If you had used the other price index,
would you get a different inflation rate? If you are unsure, do the calculation and find out.

Inflation Inflation
rate based rate based
Cost of CPI base CPI base CPI base CPI base
Year living year 1 year 1 year 4 year 1
1 940 1.00 0.88
2 970 1.03 3.19 0.91 3.19
3 1000 1.06 3.09 0.93 3.09
4 1070 1.14 7.00 1.00 7.00

The inflation rate is independent of the base year used in the calculation of the CPI.

QUESTION 11:
In the following table we have the quarterly Consumer Price Index for several countries starting in the
first quarter of 2019 (base period).
A) Calculate the interannual inflation rate using the data, in what country prices have increased
more?
B) What is the difference in prices in the last period with respect to the initial period?
C) Make a graph with the inflation rates and another one with the CPI and interpret the graph.

Table 4: Quarterly CPI in selected economies

Source: OECD statistics
United
France Germany Italy Portugal Spain States
Q1-2019 1.000 1.000 1.000 1.000 1.000 1.000
Q2-2019 1.010 1.016 1.005 1.017 1.014 1.012
Q3-2019 1.012 1.022 1.006 1.007 1.007 1.015
Q4-2019 1.013 1.019 1.002 1.013 1.018 1.017
Q1-2020 1.012 1.016 1.003 1.004 1.006 1.021
Q2-2020 1.013 1.020 1.003 1.015 1.008 1.016
Q3-2020 1.016 1.012 1.001 1.007 1.002 1.027
Q4-2020 1.014 1.013 0.999 1.012 1.011 1.030
Q1-2021 1.019 1.031 1.009 1.008 1.012 1.041
Q2-2021 1.027 1.042 1.015 1.022 1.033 1.065
Q3-2021 1.033 1.052 1.023 1.022 1.036 1.082
Q4-2021 1.041 1.061 1.035 1.036 1.069 1.098
Q1-2022 1.057 1.081 1.066 1.051 1.092 1.123
Q2-2022 1.082 1.112 1.085 1.104 1.127 1.157
Q3-2022 1.094 1.130 1.109 1.115 1.141 1.172
Q4-2022 1.104 1.152 1.156 1.138 1.140 1.176
Q1-2023 1.120 1.170 1.161 1.136 1.147 1.189
Q2-2023 1.138 1.184 1.166 1.152 1.162 1.203
Q3-2023 1.145 1.193 1.170 1.154 1.173 1.213
 Q4-2023 1.145 1.193 1.168 1.157 1.177 1.215

A) The interannual inflation rate is calculated using the change in the CPI with respect to the
same period one year before, the first period in which we can calculate the interannual
inflation rate is the first quarter of 2020. For instance, for France the inflation rate in the first
quarter of 2020 is

CPI ( Q1−2020 )−CPI ( Q 1−2019 ) 1.012−1

Inflation rate ( Q1−2020 ,Q 1 2029 )= 100= 100=1.2 %
CPI (Q 1−2019 ) 1
B) Make a graph with the inflation rates and another one with the CPI and interpret the graph.

If we do the same for all the periods and all the countries, we can create the following graphs
containing the interannual inflation rates. In the graph we observe a steady increase in the inflation
rates during 2021 and 2022, during 2023 we observe disinflation, that is the inflation rate is still
positive but lower than in previous periods.

To calculate in what countries prices have increased the most we can calculate the inflation rate
between Q4-2023 and Q1-2019, getting the following results:

German Portuga United

France y Italy l Spain States
Accumulated inflation Q1-2019
to Q3-2023 (%) 14.55 19.32 16.77 15.74 17.71 21.46

The country in which we observe a higher increase in prices is the US with 21.46% followed by
Germany with 19.32%.

QUESTION 13:
The following tables contain the CPI and the annual average nominal wages in several European
countries, calculate real wages and the change in purchasing power from the first to the last period, in
what country purchasing power of workers have increased more?

Table 5: Annual CPI in several European countries (base 2015).

Source: OECD Statistics
Spain Italy Portugal Germany France
2015 1.000 1.000 1.000 1.000 1.000
2016 0.998 0.999 1.006 1.005 1.002
2017 1.017 1.011 1.020 1.020 1.012
2018 1.035 1.023 1.030 1.038 1.031
2019 1.042 1.029 1.033 1.053 1.042
2020 1.038 1.028 1.033 1.054 1.047
2021 1.071 1.047 1.046 1.087 1.065
2022 1.160 1.133 1.128 1.161 1.120

Table 6: Average annual nominal wage in several European countries.

Source: OECD Statistics
France Germany Italy Portugal Spain
2015 36535 38131 28861 16463 26852
2016 37049 38988 29121 16553 26745
2017 37867 39992 29242 16878 26802
2018 38454 41150 29560 17423 27095
2019 39152 42376 29882 18253 27677
2020 37605 42330 28491 18492 27300
2021 39663 43628 30048 19215 28266
2022 41706 45457 31530 20323 29113

Real wages approximate the purchasing power of workers in a country, we can calculate the annual
average real wage by dividing the average nominal wage by the CPI, which is used as deflator. Since
the base year is 2015 we are converting the nominal wage to constant Euros of 2015, so the real wage
can be used to compare the evolution of workers’ purchasing power from 2015 to 2022, we can then
calculate the growth rate of the real wage between 2015 and 2022 to compare the change in each
country. The results are shown in the table below:

Evolution of real wages and growth rate from 2015 to 2022

France Germany Italy Portugal Spain
2015 36535 38131 28861 16463 26852
2016 36981 38797 29148 16453 26799
2017 37412 39205 28915 16550 26341
2018 37301 39653 28901 16916 26190
2019 37562 40252 29038 17662 26567
2020 35907 40150 27724 17896 26290
2021 37260 40151 28701 18363 26404
2022 37234 39144 27834 18011 25090
Growth 2015-2022
(%) 1.91 2.66 -3.56 9.40 -6.56

 In the table we see that the country with a highest increase of workers purchasing power is
Portugal with 9.4%, this means that nominal wages increased more than prices leading to an
increase in purchasing power.
 The opposite case is Spain, with a decline of -6.56%, so nominal wages increased less than
prices, leading to a decrease of purchasing power.