Check your knowledge – To be discussed in class September 21st

Conceptual questions: you need to know these key questions before jumping into exercises/multiple
choice questions.

1. Explain the distinction between macroeconomics and microeconomics.

Microeconomics studies individuals and business decisions, while macroeconomics analyzes the decisions
made by countries and governments.
2. Explain why simplifying assumptions in macroeconomic models are both necessary and
treacherous.

3. When is the government sector in deficit? If there is a deficit in the public sector, what happens
with public debt, does public debt increase or decrease?
The government sector is in deficit when their spendings exceed their revenues, so the public debt it is the
result of years of government leaders spending more than they take in via tax revenues. So, the
government will owe more money to outside debtors.
4. Give a definition for trade balance. Explain each of its components, and what a deficit in the
trade balance means.
It is the difference in value between a country´s imports and exports. There are 3 components:
- Current account
- Financial account
- Capital account
A deficit in the trade balance occurs when our countries imports exceed its exports during a given time
period. It is also referred to as a negative balance of trade.
5. What is the difference between a flow and a stock variable?
- Flow variables refer to barrels that are measured over a period or per unit of time.
- Stuck variables mean those barrels that are measured at a point in time.
The concepts of stock and flow are variables that have mutual dependence both to each other as well as
two other variables.
6. Define Gross Domestic Product.
GDP measures the monetary value of final goods and services produced in a country in a given period of
time.
7. Explain the differences between GDP and GNP.
- Gross domestic product (GDP) is the value of the finished domestic goods and services produced
within a nation's borders.
- Gross national product (GNP) is the value of all finished goods and services owned by a country's
citizens, whether or not those goods are produced in that country
8. Which is the difference between nominal and real GDP? Why is this difference important?
- Nominal GDP reflects the row number in current dollars unadjusted for inflation.
Nominal GDP= C + I + G + (X – M)
o C= private consumption
o I= gross investment
o G= government investment
o X= exports
o M= imports
- Real GDP adjust the number by fixing the currency value eliminating any distortion caused by
inflation or deflation.
Real GDP (in dollars) = NGDP·(GDPdeflatorbase year/ GDPdeflatorcurrent year)
 9. How do we avoid double counting when computing the GDP?
To avoid double counting we add the value of output to the GDP more than once. GDP counts only final
output of goods and services not the production of intermediate goods or the value of labour in the chain
of production.
The gap between exports and imports is called the trade balance
10. How do we value public services when computing the GDP? Which is the difference between this
way of valuing public goods versus private goods?

11. We know that GDP=INCOME=EXPENDITURE. Explain intuitively where this identity comes from.

12. If private savings is lower than investment, explain how this private deficit is financed.

13. What is the GDP deflator? How is it calculated?

The GDP price deflator measured the changes in prices for all the goods and services produced in an
economy. It helps economist comparing the levels of real economic activity from one year to another
GDP deflator= (Nominal GDP/ Real GDP) · 100
14. What is the consumer price index, and how is it calculated?
The consumer price index (CPI) is a measure of the average change overtime in the prices paid by urban
consumers for a Market Basket of consumer goods and services.
CPI= (cost of the market basket in year t/cost of the market basket in the base year) · 100
15. Define inflation.
Inflation is the rate of increase in prices over a given period of time inflation is typically a broad measure,
such as the overall increasing prices for the increase in the cost of living in a country.
RATE OF INFLATION: (CPIx+1 - CPIx)/ CPIx
16. Why do you think the inflation measured by CPI is different from the one measured by the
deflator?

17. What does the unemployment rate measure? Briefly explain its calculations.
There unemployment rate is a percentage of people in the labour force who are unemployed.
Consequently, measuring the unemployment rate requires identifying who is in the labour force. The
labour force includes people who are either employed or unemployed.
UNEMPLOYMENT RATE = (unemployed/ labour force) · 100 (the percentage of people in the labour
force that are unemployed.)
**labor force= employed and unemployed summed, the ones that want to work**
PARTICIPATION RATE = (labor force/working-age population) · 100
18. Explain the two basic approaches to measure unemployment rate.

19. Explain briefly the different types of unemployment. Think of examples.

1. Cyclical unemployment: It occurs with changes in economic activity over the business cycle. ECONOMIC
GROWTH (HIGH)  UNEMPLOYEMNT RATE (LOW). Ex: after the financial crisis of 2008
2. Structural unemployment: it occurs when there is a mismatch between the jobs that are available and the
people looking for work. this mismatch could be because job seekers don't have the skills required to do the
available jobs. Ex: robots replacing humans
3. Frictional unemployment: it occurs when people move between jobs in the labour market as well as when
people transition into and out of the labour force. It also occurs when people are unemployed for such a long
period that their skills and productivity deteriorate, and they become seen as being less employable reducing the
probability that they will be hired in the future. Ex: an employee leaves their current job before finding a new
job to replace it.
4. Other types of unemployment
a. Under employment occurs when people are employed but would like and are available to work more
hours
b. Hidden unemployment: Occurs when people are not counted as unemployed in their formal ABS labour
market statistics but would probably work if they had the chance.
c. Seasonal unemployment: Occurs at different points over the year because of seasonal patterns that
affect jobs.
EXCERSISES:
1. At the beginning of 2015 Santa Clara is public debt is €9 billion. During this year, the public
sector spent €3 billion in wages to public servants; transfers of €1.5 billion to the private sector,
and tax revenues were €2 billion if they interest rate was 5% compute the value of Santa Clara´s
public debt by the beginning of 2016.
2. Data on public sector of an economy in 2018 are the following: public spending G=20B, tax
revenues T=30B, transfers TR=10B, nominal interest rate i=5%, public debt at the beginning of
2018 PD08=60B. Compute the value of public debt in this economy at the beginning of 2019.
3. Consider the following economy:
Y= 1.200; YD = 1.000; C = 800; Z= 80; G + Z –T = 100; X–M=-150.
a. Which are the values of T, G, I and S?
b. Explain the indebtness identity.

4. Consider an economy with the following data: households savings is 15% of GDP, investment is
10% of GDP, public spending is 21% of GDP, transfers is 1% of GDP, interest payments on public
debt is 1% of GDP and consumption is 70% of GDP. How much is the trade balance, i.e. EX-IM, as
percentage of GDP?

5. Above is a simplified circular-flow diagram for the economy of Micronia.

a) What is the value of GDP in Micronia?
b) What is the value of net exports? (i.e. export-import)
c) What is de value of disposable income? (in this example Income+ Transfers- Taxes)
d) Does the total flow of money out of households—the sum of taxes paid and consumer
spending—equal to the total flow of money into households?
 e) How does the government of Micronia finance its purchases of goods and services?

6. Imagine this hypothetical economy consisting of three firms producing iron ore, steel and cars.

American Amercian American

Iron Ore, Steel, Inc. Motors, Inc.
Inc.
Value of $4,200 $9,000 $21,500
Sales (iron ore) (steel) (car)
Intermediate 0 4,200 9,000
goods (iron ore) (steel)
Wages 2,000 3,700 10,000
Interest 1,000 600 1,000
payments
Rent 200 300 500
Total
Expenditure
by firm
Profit

a) Calculate GDP as value added in production.

b) Calculate GDP as spending on final goods and services.
c) Calculate GDP as factor income. (hint: first calculate profits by firm)

7. Consider an economy that produces and consumes books, wine and clothes. In the following
table are data for two different years

2010 2017
Q P Q P
Books 10 1 20 2
Wine 15 3 20 4
Clothes 50 0,50 40 1

a. Using 2010 as the base year, compute the following statistics for each year: nominal GDP, real
GDP, the implicit price deflator for GDP and a fixed-weight price index such as the CPI
b. By what percentage did prices rise between 2010 and 2017? Give the answer for each good, and
also for the two measures of the overall price level. Compare the answers given by the
Laspeyres and Paasche indexes. Explain the difference.
 8. With its tradition of a job for life for most citizens, Japan once had a much lower unemployment
rate than the United States: from 1960 to 1995, the unemployment rate in Japan exceeded 3%
only once. However, since the crash of its stock market in 1989 and slow economic growth in the
1990s, the job-for- life system has broken down and unemployment rose to more than 5% in
2003.
a. Explain the likely effect of the breakdown of the job-for-life system in Japan on the
Japanese natural rate of unemployment.
b. As the accompanying diagram shows, the rate of growth of real GDP has picked up in
Japan after 2001 and before the global economic crisis of 2007-2009. Explain the likely
effect of this increase in real GDP growth on the unemployment rate. Is the likely cause of
the change in the employment rate during this period a change in the natural rate of
unemployment or a change in the cyclical unemployment rate?

9. National accounting in the country of Santa Ana changes its base year every five years and the
time series for the GDP deflator with base 2005 and 2010 are the following:
Year GDP Deflator Year GDP Deflator
(2005) (2010)
2005 100 2010 100
2006 106 2011 104
2007 114 2012 109
2008 119 2013 114
2009 125 2014 119
2010 132 2015 132

Join the two series with 2010 as the base year

Multiple Choice questions:

1. Mark the option that includes only flow variables:

a) the number of tourists who visit Spain each year, the decrease in unemployment, the amount of
foreign currency at the Bank of Spain.
b) the number of tourists who visit Spain each year, investment in new technologies, the amount of cars
sold in a month.
c) the number of tourists who visit Spain each year, working-age population, the amount of foreign
currency at the Bank of Spain.
d) the number of tourists who visit Spain each year, the amount of money in your current account, the
decrease in unemployment.

2. Consider a closed economy with constant government spending, G, public transfers, TR, and taxes
collection, T; in which G+TR=T; the interest rate on public debt is i=3%; and with public debt DP=3B.
Choose the correct answer:
a) In this economy, public debt grows without a limit.
b) Higher interest rates force the government to issue more debt.
c) Both a) and b) are correct.
d) Public debt next year will be zero.

3. Which of the following variables is a stock variable?

a) the €1000 that Andres has in his current account.
b) the €1000 that Ana receives as interest payments.
c) the €20 that Ana withdraws from her current account to pay for water consumption.
d) None of the above options is correct.

4. According to the national accounts, aggregate consumption

a) includes the value of imported consumption goods;
b) only includes the value of durable and services consumption goods;
c) includes the value of new housing.
d) it does not include the value of imported consumption goods.
5. Between 1970 and 1990 the Spanish nominal GDP has always been increasing, this means that:
a) every year between 1970 and 1990 the number of goods produced has been increasing;
b) every year between 1970 and 1990 prices have been increasing;
c) options a) and b) are both correct.
d) options a) and b) may be false because the evolution of nominal GDP includes both changes in
prices and quantities of the goods considered.

6. In terms of the Spanish national accounts, the spending in Spain by a Japanese tourist are
considered
a) consumption expenditure
b) currency investment expenditure
c) exports.
d) imports.

7. Consider a small closed economy. Its GDP in 2012 was 1000B. If in 2013 consumption was 700B,
housing investment 100B, public spending 50B, and the annual growth rate of GDP between 2012 and
2013 was 10%, then gross fixed capital formation and inventories in 2013 were
a) 250
b) 100
c) There is not enough data to compute it.
d) 200.

8. Which of the following would increase GDP?

a) A decline in imports, holding all other components of GDP constant.
b) A lower rate of depreciation of the economy’s capital stock.
c) An increase in government spending.
d) A decline in exports.
9. Consider an economy with GDP in 2012 equal to 1000, private consumption C=500, and zero net
exports. If in 2013 consumption increases by 5% while investment, public spending and net exports
remain constant, then:
a) GDP will increase by 5%
b) GDP will increase by 2.5%
c) We cannot compute the change in GDP.
d) GDP will increase by 3%

10. Maria’s current account at 12 am on the 1st of July 2012 was 25,34 euros, at 12 am on the 1st of
August 2012 it was 32,17 euros and at 12 am on the 1st of September it was 15,25 euros.
Therefore, the quarterly value of the current account is:
a) 15,25 euros.
b) 57,71 euros.
c) 72,76 euros.
d) 20 euros.

11. If CPI is increasing we can conclude that:

a) Inflation is increasing too.
b) Inflation is decreasing.
c) Inflation does not change.
d) None of the above is necessarily true.

12. An increase in the price of an imported car from Germany.

a) Increases the CPI.
b) Increases the Deflator.
c) Increases inflation.
d) We don’t have enough information.

13. If the price of going to the cinema is 5 euros and the price of a beer is 1 euro
a) The relative price of the cinema in terms of the beer is 5.
b) The relative price of the beer in terms of the cinema is 5.
c) We don’t have enough information.
14. If the labor force participation rate is 90% and the employment rate is 80%, then the
unemployment rate is:
a) 10%
b) 11.1%
c) we don’t have enough information to answer it.
d) 5%

15. The employment rate being lower than labor force participation rate is a sufficient
condition for having a strictly positive unemployment rate:

a) False
b) True
c) It depends.

16. In 1995 nominal and real GDP of Spain was 72.841.749M of pesetas. In 1996 real GDP was
74.546.358M and the nominal GDP was 77.113.358M of pesetas.
Then

a) the GDP deflator was 100 and 103,4 (1995 and 1996 respectively), and the annual inflation rate
5.9%.
b) CPI was 100 and 103,4 (1995 and 1996 respectively), and the annual inflation rate 5.9%.
c) we don’t have enough information.
d) GDP deflator was 100 and 103,4 (1995 and 1996 respectively), and the annual inflation rate
3.4%.