Econ 2123 Macroeconomics (2020 Fall)

ECON 2123 Macroeconomics (T1/ T6/ T7/ T8)

Tutorial 2

Sunny WONG

Basic Concepts

1. The Unemployment Rate

(1) The unemployment rate is the ratio of the number of people who are
unemployed to the number of people in the labour force.

(2) Employment (N) is the number of people who have a job. Unemployment (U)
is the number of people who do not have a job but are looking for one. The
labour force (L) is the sum of employment and unemployment.

(3) Therefore, L = N + U, and the unemployment (u) = U/L

(4) Those who do not have a job and are not looking for one are counted as not in
the labour force. When unemployment is high, some of the unemployed give
up looking for a job are called discouraged workers. The people above are
NOT counted as unemployed.

2. The Inflation Rate

➢ Inflation is a sustained rise in the general price level. There are two measures
of the price level: the GDP deflator and the Consumer Price Index (CPI).

(1) GDP deflator in year t (Pt) =

➢ The GDP deflator is what is called an index number: set base year as 100

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 Econ 2123 Macroeconomics (2020 Fall)

(2) CPI in any month =

➢ Consumer price index (CPI) measures the average price of consumption or

the cost of living.

➢ The CPI gives the cost in dollars of a specific list of goods and services over
time. (Same basket of goods in base year)

➢ Factors for inflation

▪ Demand Pull
▪ Cost Push
▪ Booming Economy

3. Bias

➢ New product bias (Period 6)

▪ Overestimate inflation rate (As it always insists to use old basket)

➢ Substitution bias (Period 5)

▪ Consider we can switch Kit Kat with Twix (From expensive to cheaper
stuff)

➢ Quality bias (Period 4)

▪ Focus on Kit Kat price remains unchanged
▪ Consider iPhone, get more advance, price remains
- Even increase CPI, enjoy better good or services (overestimate
again)

4. GDP Deflator v.s. CPI

➢ They move together most of the time.

➢ GDP deflator measures the prices of all goods and services produced, whereas
the CPI measures the prices of the goods and services bought by consumers.

➢ GDP deflator includes only those goods produced domestically, whereas the
CPI is affected by the imported prices.

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 Econ 2123 Macroeconomics (2020 Fall)

Practise Question

Question 1

Given the following:

P2005 = 100 Nominal GDP2005 = 475 Real GDP2005 = X

P2006 = 105 (Base year) Nominal GDP2006 = Y Real GDP2006 = 500

P2007 = 108 Nominal GDP2007 = 540 Real GDP2007 = 500

(a) What is the inflation rate of year 2005, 2006 and 2007

(b) Find X and Y

Question 2 (Same set of number as tutorial 1)

2005 2006
Quantity Price ($) Quantity Price ($)
Cars 10 2000 12 3000
Computers 4 1000 6 500
Oranges 1000 1 1000 1

(a) What is the real GDP in 2005 and 2006? Use average price of each goods across 2
years.

(b) What is the percentage change of real GDP from 2005 to 2006?

(c) What is the GDP deflator in 2005 and 2006? What is the inflation?