Tutorial Week 5 Principles of economics
1. Below are some data from the land of milk and honey.
Year Price of milk (€) Quantity of milk Price of honey (€) Quantity of honey
(quarts) (quarts)
2013 1 100 2 50
2014 1 200 2 100
2015 2 200 4 100
a. Compute nominal GDP, real GDP and the GDP deflator for each year, using 2013 as the base
year.
b. Compute the percentage change in nominal GDP, real GDP and the GDP deflator in 2014 and
2015 from the preceding year. For each year, identify the variable that does not change.
Explain in words why your answer makes sense.
c. Did economic well-being rise more in 2014 or 2015? Explain.
2. You observe the total value of goods and services and the average prices in the three sectors:
agriculture, manufactures and services.
Year 𝑉𝑎 𝑝𝑎 𝑉𝑚 𝑝𝑚 𝑉𝑠 𝑝𝑠
2019 1000 10 2500 20 4020 30
2020 1100 11 2793 21 4512 32
Calculate the nominal and real GDP, suing 2019 as base year. Calculate the GDP deflator and the rate
of inflation.
3. Which contributes more to the GDP – the production of an economy car or a production of a luxury
car? Why?
4. A farmer sells wheat to a baker for €2. The baker uses the wheat to make bread, which is sold for
€3. What is the total contribution of these transactions to GDP?
5. Many years ago, Jamanda paid €500 to put together a record collection. Today she sold her albums
at a car boot sale for €100. How does this sale affect current GDP?
6. Which do you think has a greater effect on the consumer prices index: a 10 per cent increase in the
price of chicken or a 10 per cent increase in the price of caviar? Why?
7. Assume that the price of a bottle of wine in 1990 was €3.50 and in 2012 it is €8.50. Further assume
that the price index in 1990 was 95 and in 2012 was 160. Was wine cheaper in 1990 than in 2012?
Explain.
8. Suppose that the residents of Vegopia spend all of their income on cauliflower, broccoli and carrots.
In 2014 they buy 100 heads of cauliflower for €200, 50 bunches of broccoli for €75 and 500 carrots
for €50. In 2015 they buy 75 heads of cauliflower for €225, 80 bunches of broccoli for €120 and 500
carrots for €100. If the base year is 2014, what is the CPI in both years? What is the inflation rate in
2015?
9. Most countries import substantial amounts of goods and services from other countries. Yet the
chapter says that a nation can enjoy a high standard of living only if it can produce a large quantity
of goods and services itself. Can you reconcile these two facts?
[Link] is the opportunity cost of investing in capital? Do you think a country can ‘over-invest’ in
capital? What is the opportunity cost of investing in human capital? Do you think a country can
‘over-invest’ in human capital? Explain.
11. Suppose that society decided to reduce consumption and increase investment.
a. How would this change affect economic growth?
b. What groups in society would benefit from this change? What groups might be hurt?
12. Assume that in a country, of all adult people, 29,500,000 were employed, 1,120,000 were
unemployed and 11,000,000 were not in the labour force. How big was the labour force? What was
the labour force participation rate? What was the unemployment rate?
13. Using a diagram of the labour market, show the effect of an increase in the minimum wage on
the wage paid to workers, the number of workers supplied, the number of workers demanded
and the amount of unemployment.
[Link] mayor of a town nearby gives you the inverse demand and supply curves for the competitive
labour market in his town: WD = 600 − 0.04QD WS = 80 + 0.01QS
a) Calculate the equilibrium wage and quantity and draw both curves in a diagram.
b) The mayor tells you that a powerful trade union is now being established in his town. It wishes
to maximize the income of its members (all workers are members). Find out at which quantity
and which wage income maximization will be achieved.
c) How much unemployment is created if the trade union aims for income maximization? Draw
the new wage rate and the unemployment in the diagram of a).
15. Consider an economy with two labour markets, neither of which is unionized. Now suppose a
union is established in one market.
a. Show the effect of the union on the market in which it is formed. In what sense is the
quantity of labour employed in this market an inefficient quantity?
b. Show the effect of the union on the non-unionized market. What happens to the equilibrium
wage in this market?