ECO121 - MACROECONOMICS

SEMESTER FALL 2020

INDIVIDUAL ASSIGNMENT

INDIVIDUAL ASSIGNMENT 1
Course Details
Subject Code : ECO121
Subject Title : MACROECONOMICS
Lecturer’s Name : MS. NGO HA TRANG
Student’s Details
1. Name: LƯƠNG THẠCH TRÂM
2. Email: tramltds150078@fpt.edu.vn

ECO121 Individual Assignment

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 INDIVIDUAL ASSIGNMENT – Answers
1. Explain why GDP is not a perfect measure of well-being. Give examples for your answer.

As we all know, GDP is the basic index to measure, show the economic well-being of a society,
evaluate a country's development based on total income and expenditure on goods and services
in an economy. However, GDP is not a perfect measure of well-being.

Firstly, GDP does not represent environmental quality. For example, GDP in 2017 shows that
Formosa has contributed to setting a record of import and export turnover of over $ 400 billion.
Formosa has created a remarkable growth in GDP growth, however, this company has ignored
concerns about environmental quality, directly discharging waste to the outside, causing not only
negatively affects the health and daily life of the surrounding communities but also cause
seriously pollutes the marine environment. Through the example, we can conclude that GDP
may increase, but social welfare decreases significantly. The cost of restoring the air and water
environment will be much greater than the profits from GDP growth.

Secondly, GDP excludes the value of leisure. Assuming that everyone works 7 days/week
without days off, more goods and services will be produced, leading to increased GDP. But
despite the increase in GDP, we cannot say whether people will have a better life because the
loss from reducing leisure time to a minimum has eliminated the benefits of having a higher
income.

Thirdly, GDP does not measure the value of non-market activities. For example, when a female
chef makes a cake and sells it at her store, the value of that cake will be counted towards GDP.
However, if the woman makes it for her son, the value of that meal is not included in GDP.
Similar to babysitting and babysitting at their parents' home. These jobs contribute a part to
social welfare, but GDP does not reflect them.

Finally, GDP also does not measure the equitable distribution of income. Suppose a city with 50
workers with an annual income of $10,000 would have a GDP of $500,000 and a GDP per capita
of $10,000. It is also true for a city with 5 workers making $100,000 and 45 unemployed. GDP
per capita is just an average number. It means that there will be differences in the GDP structure
of each person. As a result, there will be people who get higher benefits than others.

2. The problems with CPI. Give examples for your answer.

CPI is a measure of the overall cost of goods and services bought by a typical consumer. In other
words, the purpose of the CPI is to measure changes in the cost of living over time. However, the
consumer price index is not a perfect measure of the cost of living. I will discuss three problems
of CPI in detail.

The first is the problem of substitution bias. For example, it is common for homemakers to buy
oranges over apples because oranges are cheaper. However, one year later, when the price of
oranges goes higher than apples' price, homemakers tend to buy more apples. Because the CPI
uses a fixed basket, when the cost of oranges increases, the buyer will still buy the quantity as it
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 did without the price adjustment, instead of buying less than it was. For this reason, the cost of
living will be overstated the increase every year more than it is.

Next is the introduction of new goods. New goods appearing in the market lead to issues about
accuracy in measuring inflation. To demonstrate this problem, let's consider the example when
the iPhone 12 was launched. The value of the iPhone 7 will not be as high as before. Consumers
have more choices, which makes each dollar have a higher value. However, the CPI uses a fixed
cart, so it ignores the impact. As a result, the CPI significantly increases the cost of living.

The last problem is that the CPI only measures the volume of goods and services but cannot
measure the change in their quality. If the actual price increases are accompanied by an
improvement in quality, the CPI price remains the same as when the quality has not been
improved. The dollar's value is increasing because, for the same price, you can buy better ones.
This is misleading because it is difficult to measure changes in the quality of goods and services.

3. Reasons for frictional unemployment and structural unemployment.

In an ideal labor market, wages are always adjusted to balance labor supply and demand. This
adjustment ensures that all employees have jobs. Of course, in reality, this ideal labor market
does not exist. There will always be unemployed people even when the economy is stable,
meaning that Unemployment Rate is never zero. There are 4 reasons for this problem:

Firstly, employees always need some time to find a job that suits them; in other words, this
process is the job search. Unemployment in the process of finding the match between an
employee's needs and abilities with the job requirements is called frictional unemployment,
which occurs in the relatively short-term. 

The remaining three causes for surplus are the demand for labor, which exceeds the supply of
labor, the number of jobs in the market is not enough to satisfy the need for job hunting. This
type of surplus is called structural unemployment and occurs in the longer-term. This surplus
occurs when actual wages are higher than equilibrium wages that balance labor supply and
demand through the following three policies and regulations: minimum wage law, unions,
adequate wage. Although they are not the main reasons for unemployment, they still have
impacts on groups with a high unemployment rate. First, when the minimum wage is higher than
the wage at the equilibrium of supply and demand, it increases labor supply and decreases the
quantity of labor demanded relative to the equilibrium. Therefore, a labor surplus will exist
because inexperienced and the least skilled people can not find work. Besides, the third reason
affecting the unemployment rate is the union. A union is an association of workers who use
market forces to negotiate with employers for better wages, benefits, and working conditions.
When wages are above the equilibrium, unions increase labor supply and decrease the quantity
of labor demanded, thereby creating unemployment. Finally, the fourth reason for unemployment
is the efficiency wage theory. According to this theory, businesses will operate more efficiently
if they pay higher wages than equilibrium wages. It will increase workers ' productivity and
retain them longer, so companies get to benefit from keeping higher wages. In general, these
reasons impact on u-rate because they create a surplus of labor.

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 4. Dachsland’s

 Nominal GDP
1. 2005: $4 x 90 + $1.5 x 150 = 585
2. 2006: $4 x 100 + $2 x 180 = 760
3. 2007: $5 x 120 + $2.5 x 200 = 1100
4. 2008: $6 x 150 + $3.5 x 200 = 1600
 Real GDP
1. 2005: $4 x 90 + $1.5 x 150 = 585
2. 2006: $4 x 100 + $1.5 x 180 = 670
3. 2007: $4 x 120 + $1.5 x 200 = 780
4. 2008: $4 x 150 + $1.5 x 200 = 900
 GDP deflator
1. 2005: 100 x (585/585) = 100
2. 2006: 100 x (760/670) = 113.43
3. 2007: 100 x ( 1100/780) = 141.03
4. 2008: 100 x ( 1600/900) = 177.78
 Inflation rate
1. 2005-2006: ( 113.43-100)/100 x 100 =13.43%
2. 2006-2007: (141.03-113.43)/113.43 x 100 =24.33%
3. 2007-2008: ( 177.78- 141.03)/141.03 x 100=26.06% 
 
5. Yackandsnack

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  Cost of basket
1. 2006: $50 x 2 + $3 x 20 = $160
2. 2007: $60 x 2 + $4 x 20 = $200
3. 2008: $55 x 2 + $5 x 20 = $210
 CPI
1. 2006: 100 x 160/160 = 100
2. 2007: 100 x 200/160 = 125
3.  2008: 100 x 210/160 = 131.25
 Inflation rate
1. 2006-2007: (125 – 100)/100 = 25%
2. 2007-2008: (131,25 – 125)/125 = 5%

6. Wrexington
 Unemployment rate:
1.  2004: 200/(200 + 1400) x 100 = 12.5%
2.  2005: 600/(600 + 1300) x 100 = 31.6%
3.  2006: 200/(200 + 1600) x 100 = 11.1%
 Labor force participation rate
1.  2004: 1600/2000 x 100 = 80%
2. 2005: 1900/3000 x 100 = 63.3%
3. 2006: 1800/3200 x 100 = 56.25%

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ECO121 Individual Assignment
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