East West University

ECO 102 (4) | Spring’ 2022;

Assignment – I
Due on 6 March, 2022

Measuring a Nation’s Income (12 marks)

1. Consider an economy that produces only chocolate bars. In year 1, the quantity produced
is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5.
In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year.
a. What is nominal GDP for each of these three years?
b. What is real GDP for each of these years?
c. What is the GDP deflator for each of these years?
d. What is the percentage growth rate of real GDP from year 2 to year 3?
e. What is the inflation rate as measured by the GDP deflator from year 2 to year 3?
f. In this one-good economy, how might you have answered parts (d) and (e)
without first answering parts (b) and (c)?

Measuring the Cost of Living (10 marks)

2. A small nation of ten people idolizes the TV show The Voice. All they produce and
consume are karaoke machines and CDs, in the following amounts:

Karaoke Machines CDs

Quantity Price ($) Quantity Price ($)

2017 10 40 30 10

2018 12 60 50 12

a. Using a method similar to the CPI, compute the percentage change in the overall
price level. Use 2017 as the base year and fix the basket at 1 karaoke machine and
3 CDs.
b. Using a method similar to the GDP deflator, compute the percentage change in the
overall price level. Also use 2017 as the base year.
c. Is the inflation rate in 2018 the same using the two methods? Explain why or why
not.

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Production and Growth (8 marks)

3. Societies choose what share of their resources to devote to consumption and what share
to devote to investment. Some of these decisions involve private spending; others involve
government spending.
a. Describe some forms of private spending that represent consumption and some
forms that represent investment. The national income accounts include tuition as
a part of consumer spending. In your opinion, are the resources you devote to your
education a form of consumption or a form of investment?
b. Describe some forms of government spending that represent consumption and
some forms that represent investment. In your opinion, should we view
government spending on health programs as a form of consumption or
investment? Would you distinguish between health programs for the young and
health programs for the elderly?

Unemployment (20 marks)

4. In June 2009, at the trough of the Great Recession, the Bureau of Labor Statistics
announced that of all adult Americans, 140,196,000 were employed, 14,729,000 were
unemployed, and 80,729,000 were not in the labor force. Use this information to
calculate:
a. the adult population
b. the labor force
c. the labor-force participation rate
d. the unemployment rate

5. Economists use labor-market data to evaluate how well an economy is using its most
valuable resource— its people. Two closely watched statistics are the unemployment
rate and the employment–population ratio (calculated as the percentage of the adult
population that is employed). Explain what happens to each of these in the following
scenarios. In your opinion, which statistic is the more meaningful gauge of how well the
economy is doing?
a. An auto company goes bankrupt and lays off its workers, who immediately start
looking for new jobs.
b. After an unsuccessful search, some of the laid-off workers quit looking for new
jobs.
c. Numerous students graduate from college but cannot find work.
d. Numerous students graduate from college and immediately begin new jobs.
e. A stock market boom induces newly enriched 60-year-old workers to take early
retirement.
f. Advances in healthcare prolong the life of many retirees.

Best of luck!

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