1. In the nation of Timmyland, three goods are produced: toys, PBJ sandwiches, and apple juice. For three years, production and prices have been as follows:

1. Calculate the nominal GDP for all three years.

 

 

1998:  (5)200 + (1)1000 + (1.65)100 = 2165
1999:  (5.35)210 + (1.05)1200 + (1.8)105 = 2572.50
2000: (5.7)220 + (1.1)1250 + (2)(115) = 2859
 

2. Using 2000 as the base year, calculate the real GDP for all three years.


1998:  (5.7)200 + (1.1)1000 + (2)(100) = 2440
1999:  (5.7)210 + (1.1)1200 + (2)(105) = 2727
2000:  (5.7)220 + (1.1)1250 + (2)(115) = 2859
 

3. By what percent has nominal GDP grown between 1998-1999? By what percent has real GDP grown between 1998-99? What accounts for this difference?


nominal GDP growth = [(2572.5 - 2165)/2165] x 100 = 18.82%
real GDP growth = [(2727-2440)/2440] x 100 = 17.17%

Real GDP only looks at changes in production, while nominal GDP looks at both changes in prices and production.

1. Describe the difference between structural and frictional unemployment. Which is more serious, and why?


In both cases, there are enough jobs to go around.  In the case of structural unemployment, there is a mismatch between the skills required for jobs and the skills possessed by job seekers.  In the case of frictional unemployment the skills match, it just takes time and information for the job seekers to find the jobs.  Structural is more serious because it is more long-term than frictional unemployment and it require retraining and/or relocation of job seekers, which is expensive.
 

2. In chapter 6 we discussed several problems with the official unemployment rate. What factors cause this official rate to UNDERSTATE the unemployment problem?


There are two factors that cause the official unemployment rate to understate the unemployment problem.  First, this rate does not count discourage workers, who have given up looking for work but would likely take a job if offered to them.  Second, there are the underemployed who are employed, but not using all of their skills, which has negatvie implications for the economy.

1. Use the table below to answer the following question.

a) Using the table above, calculate the real price of gasoline per gallon in each year given.

1960:  (.27/20.9) x 100 = 1.29
1970:  (.33/27.9) x 100 = 1.18
1980:  (1.23/60.7) x 100 = 2.03
1990:  (1.21/94.3) x 100 = 1.28
2000:  (1.47/122.5) x 100 = 1.20

b.) Consider a candy bar costing $.25 in 1970. Using column 3 in the table above, about how much would in cost in 2000?

(1) increase in CPI from 1970 to 2000:   [(122.5 - 27.9)/27.9] x 100 = 339%
(2) apply the increase to the candy bar price:  3.39(.25) = .85
(3) add the increase to the original price: .25 + .85 = 1.09

the candy bar would cost about $1.09