Student Information

Name: TRỊNH HOÀNG DIỆP Roll number: HS180612

Room No: Class: IB1808

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ECO121_Test 01_Individual Assignment 01

Question1. (3 points)

Fill in blanks in table below;

Year 1 (2000) Year 2 (2003) Year 3 (2006)
Market Basket Items # of Units $ per unit Total Cost $ per unit Total Cost $ per unit Total Cost
Cheese 2 lbs $1.75 $3.50 $1.50 …3.00..$ $1.50 …3.00..$
Blue Jeans 2 pairs $12.00 $..24.00..... $15.50…31.00..$ $20.00 40.00.$
Gasoline 10 gallons $1.25 $..12.5..... $1.60 …16.00...$ $2.70 27.00..$
Total Cost of Basket --------- -40.00-- $ ----50.00-- $ 70.00 $

Using year 1 as our base year, using the formula above to calculate the index and

compare the CPI inflation rate over those years

Year 1 Index = (base year)? (40/40) x 100 = 100

CPI inflation rate = (125 – 100)/100 x 100% = 25%

Year 2 index =? (50/40) x 100 = 125

 CPI inflation rate = ? (175 – 125)/125 x 100% = 40%

Year 3 Index = ? (70/40) x 100 = 175

Question 2 (3 points):
a.Suppose there is an economy that produces only two goods: tequila and peyote. In 2008, the
economy produced 100 litres of tequila and 200 peyote plants. The unit prices (per litre or per plant)
in 2008 were $100 and $500. 1000 people were employed in the tequila sector, and the peyote
sector employed 500.

In 2009, the weather was particular sunny and hot, which is good for tequila production but bad for
the cultivation of peyote. As a result, the economy produced 120 litres of tequila but only 191
peyote plants in 2009.

The tequila and peyote sold for $90 per litre and $550 per plant that year. 1100 people were
employed in the tequila sector, while only 450 people worked in the peyote sector.

Answer the following questions:

a. How much is Nominal GDP in 2008 and 2009? What is the percentage change?
b. How much is Real GDP in 2008 and 2009, by considering 2008 as the base year? What is
the percentage change?
c. How much is the GDP deflator in the two years? By what percentage does the price level
change from the base year to 2009?
d. What was the growth rate of average labour productivity for the whole economy between
2008 and 2009?

Key:
tequila peyote
2008 (base year) $100 100 litres $500 200
2009 $90 120 litres $550 191

a. Nominal GDP in 2008 = 100 x 100 + 500 x 200 = $110 000

Nominal GDP in 2009 = 90 x 120 + 550 x 191 = $115 850
the percentage change = (115850 – 110000)/110000 x 100% = 5.32%

b. Real GDP in 2008 = 100 x 100 + 500 x 200 = $110 000

Real GDP in 2009 = 100 x 120 + 500 x 191 = $107 500
the percentage change = (107500 – 110000)/110000 x 100% = -2.27%

c. the GDP deflator in 2008 = 110000/110000 x 100% = 100%

the GDP deflator in 2009 = 115850/107500 x 100% = 107.77%

d. Productivity in 2008 = 110000/(1000 + 500) = $73.33 per worker

Productivity in 2009 = 107500/(1100 + 450) = $69.35 per worker
Growth rate = (69.35 – 73.33)/73.33 x 100% = -5.43%
b.In the country of Kwaki, people produce canoes, fish for salmon, and grow corn. In one year they
produced 5000 canoes using labor and natural materials only, but sold only 4000, as the economy
entered a recession. The cost of producing each canoe was $1000, but the ones that sold were priced
at $1250. They fished $30 million worth of salmon. They used $3 million of the salmon as fertilizer
for corn. They grew and ate $55 million of corn. What was Kwaki's GDP for the year?

GDP = 4000 x $1250 + 1000 x $1000 + $27 000 000 + $55 000 000 = $88 000 000

Question 3 (2 points)
Case 1: Output approach
Two commodities and two countries
Given the resources, Singapore and Malaysia can produce the following products –
television sets and cars (see Table 01)
Countries TV sets Cars (units)
Singapore 100 50
Malaysia 60 40
Table 01
+ Which country has the absolute advantage in the production of both TV sets and Cars over
the other? -> Singapore
+ Which country has the comparative advantage either in the production of TV sets or in the
production of Cars over the other? Calculate and Explain

Key:
For Singapore:
Opportunity Cost of TV sets = (50 cars) / (100 TV sets) = 0.5 cars per 1 TV set
Opportunity Cost of Cars = (100 TV sets) / (50 cars) = 2 TV sets per car

For Malaysia:
Opportunity Cost of TV sets = (40 cars) / (60 TV sets) = 0.67 cars per TV set
Opportunity Cost of Cars = (60 TV sets) / (40 cars) = 1.5 TV sets per car

 Singapore has a lower opportunity cost for producing TV sets (0.5 cars per TV set)
compared to Malaysia (0.67 cars per TV set).
 Therefore, Singapore has a comparative advantage in producing TV sets.

 Malaysia has a lower opportunity cost for producing cars (1.5 TV sets per car) compared
to Singapore (2 TV sets per car).
 Therefore, Malaysia has a comparative advantage in producing cars.

Case 2: Input approach

Two commodities and two countries
Give the resources, America and England can produce one unit for both Steel and Coal in
terms of number of working hours shown as follows:
Countries One unit of Steel One unit of Coal
required required
America 80 man-hours 90 man-hours
England 120 man-hours 100 man-hours
Table 02
+ Which country should specialize in the production of Steel? Calculate and Explain
 + Which country should specialize in the production of Coal? Calculate and Explain
Key:
Opportunity cost of producing 1 unit of Steel in American = 80/90 = 0.89 unit of Coal
Opportunity cost of producing 1 unit of Steel in England = 120/100 = 1.2 unit of Coal
 American has the comparative advantage in the production of Steel
(because opt.cost of American < opt.cost of England)
 American should specialize in the production of Steel

Opportunity cost of producing 1 unit of Coal in American = 90/80 = 1.125 unit of Steel
Opportunity cost of producing 1 unit of Coal in England = 100/120 = 0.83 unit of Steel
 England has the comparative advantage in the production of Coal
(because opt.cost of England < opt.cost of American)
 England should specialize in the production of Coal

Case 3: Input approach

Two countries but multiple commodities
The following Table 03 shows the numbers of man – days taken to produce an equivalent
amount of six commodities in each of the two countries – Switzerland and Sweden.
Countries Coal Cotton Wool Iron Wheat Maize
Switzerland 120 60 70 100 140 80
Sweden 100 25 35 90 90 20
Table 03
+ Assuming that there are no other costs of production. Which two commodities is Sweden
most likely to import from Switzerland? Calculate and Explain

Key:
- In Switzerland, 1 Coal = 0.5 Cotton = 0.58 Wool = 0.83 Iron = 1.67 Wheat = 0.67 Maize
- In Sweden, 1 Coal = 0.25 Cotton = 0.35 Wool = 0.9 Iron = 0.9 Wheat = 0.2 Maize
 Sweden should import Coal because the opportunity cost of Coal is the highest
opportunities cost in this country -> Coal will be the most priority to import.
 The second most opt.cost in Sweden is Iron and Wheat -> They should import one of
them but Iron in Switzerland has less opt.cost than Wheat -> Switzerland will produce
more Iron -> Sweden should import Iron
 2 commodities is Sweden most likely to import from Switzerland is Coal and Iron

Question 4. (2 points)
Indicate whether each of the following groups is helped or hurt by inflation
A. Banks who extend many fixed rate loans Hurt

B. Students who put savings in a fixed rate savings account Hurt

C. Mechanics who pay for new tools with a fixed rate loan Helped

D. People who sign a four-year lease on an apartment Helped

E. Homeowners who purchase a home and have a 30-year fixed rate mortgage Helped
F. Homeowners who purchase a home and have a 30-year adjustable rate mortgage Hurt

2. An increase in the CPI from 200 to 225 would indicate an annual rate of measured inflation of
a. 1.3% b. 12.5% c. 25% d. 200% e. 225%

b. The price index for the current year is 180. This means that, on average, prices in the current year
are
a. $0.80 higher than prices in the base year. b. $1.80 higher than prices in the base
year.
c. 80 percent of prices in the base year. d. 180% higher than base year
prices
e. 80% higher than base year prices