Yuanjie Zhu (21210660168)

HOMEWORK 1

1. (20’)

2018 2019 2020

P Q P Q P Q

Good A $40 950 $41 1000 $46 1050

Good B $102 200 $105 205 $106 210

a) Compute nominal GDP in each year.

���2018 = $40 × 950 + $102 × 200 = $58,400

���2019 = $41 × 1000 + $105 × 205 = $62,525

���2020 = $46 × 1050 + $106 × 210 = $70,560

b) Compute real GDP in each year using 2020 as the base year.

Using 2020 as base year: �� = $46, �� = $106

���� ���2018 = $46 × 950 + $106 × 200 = $64,900
���� ���2019 = $46 × 1000 + $106 × 205 = $67,730
���� ���2020 = $46 × 1050 + $106 × 210 = $70,560

2. Try to compute the CPI (20’)

 Basket: 20pizzas, 10 compact discs

 For each year, compute:

 The cost of the basket

 The CPI (use 2012 as the base year)

 The inflation rate from the preceding year

 Yuanjie Zhu (21210660168)

Prices Pizza CDs

2012 $10 $15

2013 $12 $16

2014 $13 $17

2015 $14 $16

2012: ���� �� �ℎ� ������ = $10 × 20 + $15 × 10 = $350

��� = 100%

2013: ���� �� �ℎ� ������ = $12 × 20 + $16 × 10 = $400

��� = $400 ÷ $350 × 100% = 114.29%
��������� ���� = 114.29% − 100% ÷ 100% = 14.29%

2014: ���� �� �ℎ� ������ = $13 × 20 + $17 × 10 = $430

��� = $430 ÷ $350 × 100% = 122.86%
��������� ���� = 122.86% − 114.29% ÷ 114.29% = 7.5%

2015: ���� �� �ℎ� ������ = $14 × 20 + $16 × 10 = $440

��� = $440 ÷ $350 × 100% = 125.71%
��������� ���� = 125.71% − 122.86% ÷ 122.86% = 2.32%

3. Suppose that you have the following series for real GDP. (20’)
Year Real GDP
2002 ¥32,500
2003 ¥34,500
2004 ¥35,000
2005 ¥37,000

a) Calculate the trend rate of growth assuming a constant annual growth

rate.

1
���� = (￥37,000 ÷ ￥32,500)3 − 1 = 4.42%

b) Rewrite the series in terms of deviation from trend.

2003: 34,500 ÷ 32500 − 1 − 4.42% = 1.73%

2004: 35,000 ÷ 34500 − 1 − 4.42% =− 2.97%
2005: 37,000 ÷ 35000 − 1 − 4.42% = 1.29%
 Yuanjie Zhu (21210660168)

4. Read the paper China’s Economic Growth in Retrospect by Yao Yang

and answer the following questions (40’).

a) Why Professor Yao said “In economic terms, there is probably little

miracle in China’s miraculous growth”? (10’)

In general China’s economic growth followed neoclassical theory that the country
was aiming for high saving, high investment, accumulation of human capital,
technological progress, and industrialization.
Although China’s economic grew significantly fast after 1978, the accumulation of
capital and building the foundation of the heavy industry had begun much earlier. With
the rigorous planning, China was able to have a national saving rate of 25-30 percent
and made the industry sector to contribute 46% of the total GDP by 1975.
Besides of accumulation of working capital, labor capital is also a very important
factor in the China’s economic growth. China benefited from the demographic structure
that the working-age ratios was at around 55 percent and then increased to 65 percent by
the end of the 1980s. It enabled China to conduct large-scale labor-intensive export.
The quality of labor is another important factor. At the early years of PRC, the
government tried hard to raise the basic education level for the ordinary citizen, which
helped the industry to be able to produce most of the products that foreign countries
need.

b) Pick one of the most important reforms that contributed to china’s

economic growth post 1978 and explain why. (20’)

One of the most important policy that contributed to China’s high economic
growth is the Reform and Opening policy. The policy allowed China to become an
important exporter in the world and later be the biggest one after China joined in WTO.
Before 1978, although China had a high saving rate and a solid industrial
foundation, domestic demand could not support the economic growth. Reform and
Opening not only released the capacity of the heavy industry, but also invited foreign
investments to help the country building infrastructure, which increased overall national
technology progress.
Furthermore, high increasing export businesses attracted large amount of young
working age people from the rural area to the coastal cities. It speeded up the
urbanization progress, increased overall labor productivity, and highly promoted the
domestic demand because these young city people had strong consumption willing after
making money at cities, comparing to when they were at hometown.
 Yuanjie Zhu (21210660168)

c) Consider the recent slowdown in China’s economic growth. Suggest

some explanations for the slowdown. (10’)

China’s economy has relied on export for several decades. Foreign demand drove the
domestic industrial expansion ceaselessly, until the recent 2008 economic crises let the
Chinese Government realize that export is not an ultimate solution for the economic
growth.
Despite the foreign demand recovered quickly, the advantages for China’s economy
growing tremendously have almost depleted. The first thing is demographic structure.
Those young working age people who contributed for the high economic growth have now
mostly retired. Because of the family planning, the demographic structure of China has
become an inverted triangle, therefore, China must increase the overall labor productivity
to support the aging society.
Besides labor productivity, working capital productivity is also needed to be increased.
Since 2005, ROC has been declining and shows no sign of stop. A careful and thorough
capital allocation plan must be developed and reducing wasteful financial resources
received by the SOE sector is a must.
While China wants to have a structure change, deindustrialization and international
environment are two big obstacles. GDP of most developed countries are consisted with
large percentage of domestic consumption and high-end industrial production. Domestic
consumption is supported by the high wage of labors, which come back to the problem of
increasing the overall labor productivity. One way to bypass the problem is to increase the
foreign capital investment. However, just like making innovation breakthrough, a friendly
international environment is essential. Therefore, despite China will not rely on export in
the future, the relationship with other countries in the world is still important.