ECON 304 Summer 2013 Homework 1 Solution

1. You will need the following links for answering this question: Nominal Wage (call it W) andConsumer Price Index (call it P) in the US economy1.We want to study two recessions in the US economy. The following table shows the periods ofthese recessions2:period of recession(month/year)1 11/1973 03/19752 12/2007 06/2009A) For each recession, calculate the real wage, that is W/P, for the beginning and ending date ofthe recession. For each recession, what is the percentage change in the real wage from the firstmonth to the last month?B) The period of 01/1997 12/2000 is usually called the New Economy that describes theexcellent performance of the US economy. Calculate the real wage for the first and last month ofthis period. Then calculate the percentage change in the real wage during the period.C) Click on this link for number of employees (call it N) in the US economy. In the link, you seea graph. Just above the graph if you click on Download Data in Graph you can download thedata in excel format. Now, calculate the percentage change in N for the period 12/200706/2009 and for the period 01/1997 12/2000. Compare your results.1If you are interested you can have access to a huge data set in Federal Reserve Economic Data (FRED) by thiswebsite.2If you are interested you can look at this link of National Bureau of Economic Research (NBER) for US BusinessCycle Expansions and Contractions.2. We want to study how one can measure the annual economic growth rate for a country. Youwill need the following links for answering this question: Nominal GDP (call it X) and Inflation(calculated according to GDP Deflator) (call it P).Let us also call the real GDP as variable Y. That is . Then, remember from the class that by anapproximation, we have:We would like to use this approximation since we do not have a direct access to price levels. Foreach country, note that is the economics growth rate, that is, the percentage change in the realGDP from one year to the next year. Also note that is simply the inflation. From the links abovefind , and (You need to find the inflation rate in year 2010). Then calculate and for each countryin the table.ChinaUnitedKingdomNigeriaFrance3. Suppose we have a simple Wood Economy described as follows. There are two firms in thiseconomy. The first one is named PennWood who produces two types of output: paper and lumberof wood. The second firm is named BestWood who produces tables and chairs.The following chart describes the relevant revenue and cost information for our simple WoodEconomy:PennWoodRent on land$ 300,000Wages paid to employees800,000Taxes paid to government300,000Revenue from selling lumbers of wood to BestWoodRevenue from selling papers to public2,600,000700,000BestWoodLumber wood purchased from PennWoodRent on landWages to employeesTaxes paid to governmentRevenue from selling chairs and tables to public$ 2,600,000200,0001,200,000200,0006,000,000Calculate nominal GDP using (a) the expenditure approach (b) the production (added value)approach, and (c) the income approach and show that all three give the same answer.Hint: For the income approach we should consider four agents: employees, firm owners, thegovernment, and land owners.4. Suppose that David has $1000. In the beginning of a year he decided to put his money in asaving account with 5% interest rate per year. The CPI was 150 in the beginning of that year. Heexpected that the CPI would be 153 in the beginning of the next year . However, it turned out thatthe CPI was 156 in the beginning of the next year.A) Calculate the inflation rate, the actual ex-post real interest rate, and the expected real interestrate.B) Why the actual ex-post real interest rate is different from the expected interest rate? Explainwhat features of the economy can generate this gap.C) Suppose David had another alternative. There was a one-year government bond at thebeginning of the first year for $1,000. He would receive principal plus interest totaling $1,020 atthe beginning of the next year. According to his expectation, did David decide rationally onputting his money in the saving account instead of buying the bond?