UNIVERSITY OF FINANCE –MARKETING

CENTER OF INTERNATIONAL COOPERATION

Subject: Principle of economics

Lecturer: Tran Nguyen Ngoc Anh Thu
Chapter: 24,25,28
Student: Trinh Thi Thuy Linh
Class: IP_17DMA
ID: 172 100 1452
CHAPTER 24:

Question 2: The three problems in the consumer price index as a measure of the cost of living
are:
(1) substitution bias, which arises because people substitute toward goods that have become
relatively less expensive;
(2) the introduction of new goods, which are not reflected quickly in the CPI
(3) unmeasured quality change.

Question 5: The nominal interest rate is the rate of interest paid on a loan in dollar terms. The
real interest rate is the rate of interest corrected for inflation. The real interest rate is the
nominal interest rate minus the rate of inflation.

Problem 2:
a..
Year Cauliflower Broccoli Carrots
2010 200/100 = $2 75/50 =$1.5 50/500 =$0.1
2011 225/75 = $3 120/80 =$1.5 100/500 =$0.2

b.
the cost of the market basket in each year:
2010: (100 × $2) + (50 × $1.50) + (500 × $0.10) = $325
2011: (100 × $3) + (50 × $1.50) + (500 × $0.20) = $475

using 2010 as the base year, the CPI in each year:

CPI 2010: 325/325 × 100 = 100
CPI 2011: 475/325 × 100 = 146

c.
the inflation rate for 2011: (146 – 100)/100 × 100 = 46%

Problem 3:
a. The percentage change in the price of tennis balls is ($2 – $2)/$2 × 100 = 0%.
The percentage change in the price of golf balls is ($6 – $4)/$4 × 100 = 50%.
The percentage change in the price of Gatorade is ($2 – $1)/$1 × 100 = 100%
b. The cost of the market basket in 2011 is (100 x $2) + (100 x $4) + (200 x $1) = $800.
The cost of the market basket in 2012 is (100 x $2) + (100 x $6) + (200 x $2) = $1,200.
Using 2011 as the base year, we can compute the CPI in each year:
2014 = ($800/$800) x 100 = 100
2015 = ($1,200/$800) x 100 = 150
We can use the CPI values to compute the percentage change in the overall price level:
(150-100)/100 x 100 = 50%.
c.This would lower my estimation of the inflation rate because the value of a bottle of Gatorade
is now greater than before. The comparison should be made on a per-ounce basis.

d. More flavors enhance consumers’ well-being. Thus, this would be considered a change in
quality and would also lower my estimate of the inflation rate.
Problem 5
a. The cost of the market basket in 2011 is (1 × $40) + (3 × $10) = $70.
The cost of the market basket in 2015 is (1 × $60) + (3 × $12) = $96.
Using 2011 as the base year, we can compute the CPI in each year:
2014: $70/$70 × 100 = 100
2015: $96/$70 × 100 = 137.14
We can use the CPI to compute the inflation rate for 2012:
(137.14 – 100)/100 × 100 = 37.14%

b. Nominal GDP for 2011 = (10 × $40) + (30 × $10) = $400 + $300 = $700.
Nominal GDP for 2012 = (12 × $60) + (50 × $12) = $720 + $600 = $1,320.
Real GDP for 2011 = (10 × $40) + (30 × $10) = $400 + $300 = $700.
Real GDP for 2012 = (12 × $40) + (50 × $10) = $480 + $500 = $980.
The GDP deflator for 2011 = ($700/$700) × 100 = 100.
The GDP deflator for 2012 = ($1,320/$980) × 100 = 134.69.
The rate of inflation for 2012 = (134.69 – 100)/100 × 100 = 34.69%.

c. No, it is not the same. The rate of inflation calculated by the CPI holds the basket of goods
and services constant, while the GDP deflator allows it to change and holds the prices
constant.

CHAPTER 25:

Question 2: The four determinants of productivity are:

(1) physical capital, which is the stock of equipment and structures that are used to produce
goods and services;
(2) human capital, which consists of the knowledge and skills that workers acquire through
education, training, and experience;
(2) natural resources, which are inputs into production that are provided by nature
(4) technological knowledge, which is society’s understanding of the best ways to produce
goods and services.
Problem 3:
3. a. Private consumption spending includes buying food and buying clothes; private
investment spending includes people buying houses and firms buying computers. Many other
examples are possible. Education can be considered as both consumption and investment.
b. Government consumption spending includes paying workers to administer government
programs; government investment spending includes buying military equipment and building
roads. Many other examples are possible.

Problem 4.The opportunity cost of investing in capital is the loss of consumption that results
from redirecting resources toward investment. Over-investment in capital is possible because
of diminishing marginal returns. A country can "over-invest" in capital if people would prefer to
have higher consumption spending and less future growth. The opportunity cost of investing in
human capital is also the loss of consumption that is needed to provide the resources for
investment. A country could "over-invest" in human capital if people were too highly educated
for the jobs they could get for example, if the best job a Ph.D. in philosophy could find is
managing a restaurant.

Problem 10: a) technological progress. Labour productivity has risen due to innovation and
technology

b) No, as it shows growth in technology.

CHAPTER 28:

Question 1. The BLS categorizes each adult (16 years of age and older) as employed,
unemployed, or not in the labor force. The labor force consists of the sum of the employed and
the unemployed. The unemployment rate is the percentage of the labor force that is
unemployed. The laborforce participation rate is the percentage of the total adult population
that is in the labor force.

Question 2. Unemployment is typically short term. Most people who become unemployed are
able to find new jobs fairly quickly. But most unemployment observed at any given time is
attributable to the relatively few workers who are jobless for long periods of time.

Question 3. Frictional unemployment is inevitable because the economy is always changing.

Some firms are shrinking while others are expanding. Some regions are experiencing faster
growth than other regions. Transitions of workers between firms and between regions are
accompanied by temporary unemployment.

Problem 1.
a. The adult population consists of the number of employed (143,322,000) plus the number of
unemployed (12,332,000) plus those not in the labor force (89,008,000), which equals
244,662,000.
b. The labor force consists of the number of employed (143,322,000) plus the number of
unemployed (12,332,000), which equals 155,654,000.
c. The labor-force participation rate is the labor force (155,654,000) divided by the adult
population (244,662,000) times 100, which equals 63.6%. d. The unemployment rate is the
number of unemployed (12,332,000) divided by the labor force (155,654,000) times 100,
which equals 7.9%.

Problem 3. The fact that employment increased 4.9 million while unemployment declined 2.7
million is consistent with growth in the labor force of 2.2 million workers. The labor force
constantly increases as the population grows and as labor-force participation increases, so the
increase in the number of people employed may exceed the reduction in the number
unemployed.

Problem 4
a. If an auto company goes bankrupt and its workers immediate begin looking for work, the
unemployment rate will rise and the employment-population ratio will fall.
b. If some of the unemployed auto workers give up looking for a job, the unemployment rate
will fall and the employment-population ratio will remain the same.
c. If numerous students graduate from college and cannot find work, the unemployment rate
will rise and the employment-population ratio will remain unchanged.
d. If numerous students graduate from college and immediately begin new jobs, the
unemployment rate will fall and the employment-population ratio will rise.
e. If a stock market boom induces earlier retirement, the unemployment rate will rise and the
employment-population ratio will fall.
f. Advances in health care that prolong the life of retirees will not affect the unemployment
rate and will lower the employment-population ratio.