METU

Department of Economics
Econ 210-All Sections
PROBLEM SET #5
Chapters 24&25
1.Consider an economy that produces three goods: cars, computers, and
oranges. The quantities and prices per unit of years 2018 and 2019 are given in
the table below:
2018 2019
Quantity Price (in €)
Cars 10 2000
Computers 4 1000
Oranges 1000 1
(a) Calculate the value of nominal GDP in both 2018 and 2019. By what
percentage did nominal GDP change between 2018 and 2019?

(b) Using the prices in 2018 as the set of common prices, calculate real GDP in
2018 and 2019. Based on the obtained values, compute the percentage change
in real GDP between 2018 and 2019?

(c) Using the average price of each good over the two years, recalculate real GDP
for 2018 and 2019 as well as the percentage change in between. Note how the
obtained figures compared to those computed above.
(d) Using 2018 as the base year, calculate the GDP deflator in 2018 and 2019 and
the corresponding inflation rate between the two years.

2. Country X is a country with simple economy that produces only six goods:
oranges, t shirts, papers, books, bicycles and orange juice. Assume that half of
the oranges are used to produce orange juice and one-third of all paper is used to
produce books.

a. Use the production and price information in the table to calculate nominal GDP
for the year 2021.
 b. Use the production and price information in the table to calculate real GDP for
2019, 2020 and 2021 using 2019 as a base year. What is the growth rate of real
GDP in 2020 and in 2021?

c. Use the production and price information in the table to calculate GDP deflator
for 2019, 2020 and 2021 using 2019 as a base year. Find inflation based on GDP
deflator.

d. Take 2019 as the base year, and take consumption in 2019 as the basket for
constructing the CPI and calculate the CPI for each year.

Production Stage Sales Revenue (in $) Cost of Intermediate Inputs (in $)

Mining 500,000 200,000
Manufacturing 1,200,000 600,000
Transportation 800,000 400,000
Retail 2,000,000 1,000,000
3.Consider the following table, which illustrates the production process of a
fictional economy. Use the provided data to compute the value added at each
stage of production, determine the GDP of the economy based on the total value
added, and discuss the significance of value added in assessing the contribution
of each stage to the economy's overall output and income.
a) Calculate the value added at each stage of the production process.
b) Determine the GDP of the economy based on the total value added.

4.Answer true-false questions and if answer is false explain why

a) To compute inflation accurately we should know nominal GDP

b) Base year for GDP calculation is the year in which prices are highest

c) Government expenditures are exogenous

d) Investment is an endogenous variable

e)Disposable income and tax have positive relationship

f) GDP = GNP+net exports

g) Unemployment is a measure to understand a country’s welfare level.

h) In an economy with full employment, the unemployment rate is zero.

5. How many methods exist to calculate GDP ? Explain each of the methods in
detail.
6. In a hypothetical country, the labor force participation rate is 65%, the
employment-to-population ratio is 60%, and the population is 100 million.
Calculate the number of unemployed individuals in this country.

7. In a hypothetical country, the labor force consists of 50 million individuals. Out

of these, 45 million are employed, and the remaining 5 million are classified as
unemployed. Among the unemployed, 2 million individuals are actively seeking
employment, while the rest have given up searching for a job due to
discouragement.
Calculate the following:

a)The labor force participation rate.

b)The unemployment rate.

c)The labor force's size if all discouraged workers decide to re-enter the labor
market and actively seek employment.

8.According to the scenarios provided below, classify the unemployment

experienced by individuals as frictional, structural, or cyclical unemployment:

a) Ginny, a recent college graduate, decides to leave her part-time job to search
for a full-time position that aligns better with her skills and career aspirations.

b) Neville, a skilled machinist, loses his job when the factory he works for
automates its production process, leading to a reduced need for manual labor.

c) Luna, an experienced marketing executive, struggles to find employment

during an economic downturn when companies are cutting costs and reducing
their marketing budgets.

d) Draco, a middle-aged accountant, is laid off from his job due to outsourcing to
a country where labor costs are significantly lower.

9. In a hypothetical economy, the income approach is used to calculate Gross

Domestic Product (GDP). The following data represents the income earned by
various factors of production:

Compensation of employees: $800 billion

Gross operating surplus: $450 billion
Taxes on production and imports: $70 billion
Subsidies: $30 billion
Net income earned abroad: $40 billion
Consumption of fixed capital: $120 billion
Indirect business taxes: $50 billion
Depreciation of government-owned capital: $10 billion
Statistical discrepancy: $5 billion

a)Calculate the Gross Domestic Product (GDP) of this economy using the income
approach.
b) Calculate GDP per capita for 50 million country population
MULTIPLE CHOICE
1. Which of the following is a macroeconomic question?
a. What determines the number of textbooks a publisher should publish?
b. What determines the post-college earnings of English majors?
c. How do members of a household decide whether to clean their own houses or
hire someone else to do it?
d. What is the rate of unemployment?
e. What is the price of a new 40-inch television?

2. Which of the following statements best describes the main difference between
macroeconomics and microeconomics?
a) Microeconomics focuses on individual markets and economic agents, while
macroeconomics examines aggregate economic variables at the national level.
b) Macroeconomics studies the behavior of individual consumers and firms, while
microeconomics analyzes the overall performance of the economy.
c) Microeconomics investigates government policies and their impact on
economic outcomes, while macroeconomics studies the interactions between
supply and demand in specific markets.
d) Macroeconomics examines the allocation of resources among different
industries, while microeconomics focuses on the overall level of output and
employment in the economy.

3.Which of the following components is NOT included in the expenditure

approach to calculating Gross Domestic Product (GDP)?
a) Government spending b) Investment c) Imports d) Consumption

4.In the income approach to calculating Gross Domestic Product (GDP), which of
the following is NOT considered as a component of income earned within the
domestic economy?

a) Compensation of employees b) Gross operating surplus c) Net exports d)

Consumption of fixed capital

5. In a hypothetical economy, the following data represents the expenditure

components:
Consumption expenditure: $800 billion
Investment expenditure: $400 billion
Government expenditure: $200 billion
Exports: $300 billion
Imports: $250 billion

What is the Gross Domestic Product (GDP) of this economy using the expenditure
approach?
a) $1,350 billion
b) $1,500 billion
c) $1,550 billion
d) $1,650 billion
6. According to the graphic below which terms should fill numbered blanks.

A)Trough-expansion-peak-contraction

B) recession-recovery- peak-trough

C) Peak- recession-trough- recovery

D)Peak-recovery-trough-contraction

7) Structural stagnation refers to a prolonged period of slow economic growth

due to:
a) Cyclical fluctuations in the business cycle
b) Inadequate aggregate demand in the economy
c) Structural imbalances and inefficiencies in key industries
d) Unanticipated shocks to the economy

8) What is the average annual economic growth rate if an economy grows from
$500 billion to $600 billion over a five-year period?
a) 1%
b) 2%
c) 3%
d) 4%

9.Which of the following factors is NOT typically considered a determinant of

long-term economic growth?
a) Technological progress
b) Investment in physical capital
c) Short-term fluctuations in the business cycle
d) Human capital accumulation

10. In considering the future of unemployment, which of the following economic

theories provides insights into the potential impact of globalization and
outsourcing on labor markets?
a) Monetarism
b) Classical economics
c) Keynesian economics
d) Structural unemployment theory

11. Which of the following statements best describes a complication associated

with calculating Gross Domestic Product (GDP)?
a) GDP fails to account for changes in the quality of goods and services over
time.
b) GDP accurately captures the informal sector of the economy, such as black
market activities.
c) GDP includes only monetary transactions and excludes non-market activities
like household production.
d) GDP provides an accurate measure of the distribution of income within the
economy.

12. Which of the following is a macroeconomic question?

a. What determines the number of textbooks a publisher should publish?

b. What determines the post-college earnings of English majors?

c. How do members of a household decide whether to clean their own houses or

hire someone else to do it?

d. What is the rate of unemployment?

e. What is the price of a new 40-inch television?