EC1506 – Tutorial 1 (week 28)

2021-

This week’s tutorial is on GDP and cost of living.

Recommended readings: Mankiw and Taylor, chapters 20 and 21.

Warm-Up True/False Questions

i) [Topic 2] It is impossible for real interest rates to be negative.

a. True

b. False

ii) [Topic 1] A country with a larger GDP per person generally has a greater standard of living or
quality of life than a country with a smaller GDP per person.

a. True

b. False

iii) [Topic 2] If the nominal interest rate is 12 per cent and the rate of inflation is 7 per cent, then the
real rate of interest is 5 per cent.

a. True

b. False

iv) [Topic 2] The "base year" in a price index is the benchmark year against which other years are
compared.

a. True

b. False

v) [Topic 1] In the circular-flow diagram, payments for labour, land, and capital flow from firms to
households through the markets for the factors of production.

a. True

b. False

vi) [Topic 1] Changes in the GDP deflator reflect only changes in the prices of goods and services.

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 a. True

b. False

Question 1 [Topic 1]

List the four components of GDP. Give an example of each.

Question 2 [Topic 1]

What is meant by “GDP per capita” and how is it measured?

Question 3 [Topic 2]

In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods
used to compute the CPI consists of 50 units of food and 10 units of clothing.

Food Clothing
2013 price per unit €4 €10
2014 price per unit €6 €20
a. What is the percentage increases in the price of food and in the price of clothing?

b. What is the percentage increase in the CPI?

c. Do these price changes affect all consumers to the same extent? Explain.

Question 4 [Topic 2]

You find that your salary for the year is higher this year than it was last year. Does that mean that
your real income has increased? Explain carefully.

Question 5 [Topic 2]

Which is likely to have the larger effect on the CPI, a 2 per cent increase in the price of food or a 3 per
cent increase in the price of diamond rings? Explain.

Question 6 [Topic 1]

In Europe, real GDP is substantially higher today than it was 60 years ago. What does this tell us, and
what does it not tell us, about the well-being of Europeans?

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Question 7 [Topic 1]

Important note: On top of the above problems, you are warmly encouraged (as extra practice) to
attempt the “questions for review” and “problems and applications” at the end of the relevant
chapters of the reference textbook. Please note that such problems will not be discussed by either
the lecturer or the tutors, but they are nonetheless important in that they constitute an additional
useful tool to prepare for the quizzes and the final examination.