1303AFE Economics for Decision Making 1

Questons:

Task 1:

1. Why does paying someone to mow your lawn add to GDP, but your housemate doing it for free does not? Briefly discuss  and provide an example of such a situation
   
   
2. In the country of Classica, we have the following information for the year 2012:

Consumption stood at $1 billion dollars worth of new goods and services, 20% of which were bought by foreigners residing there.

New housing stock worth $100 million was sold.

Company profit totalled $200 million.

Businesses bought $150 million dollars worth of bonds.

The government of Classica bought $200 million worth of guns for the military.

Citizens of Classica living overseas bought $50 million worth of goods from Classica.

(i) Calculate and explain how you obtained the figure (i.e. what did you count, and what did you exclude) for Classica’s consumption in 2012

(ii) Calculate and explain how you obtained the figure (i.e. what did you count, and what did you exclude) for Classica’s investment in 2012

(iii) What was Classica’s GDP in 2012? Explain your answer

3. The standard of living in China is higher than the standard of living in Belgium as the size of China’s real GDP in 2018 (using 2010 constant prices) was USD10,800,568.39 million compared to Belgium’s USD538,738.79 million (figures from the World Development Index Database).

Do you agree or disagree with this statement? Refer to the UN Human Development Index to Justify your answer.

Task 2:

1. A worker was paid $120,000 in 2020, but for doing the exact work, was paid $90,000 in 2010. Within this time period, the rate of inflation grew by 40%.

(i) Would the worker have been better off linking her wages with the rate of inflation? Justify your answer.

(ii) What is her real wage rate in 2020 in terms of 2010 dollars, assuming CPI in 2010 was the base year?

(iii) Assume the worker did have the option of linking her wages with the rate of inflation but chose not to. Based on your understanding of the topic, provide one potential reason why she chose not to so, and justify your answer.

2. Banks care about the real interest rate, not the nominal interest rate. Briefly explain how they would react if inflation is likely to increase? Justify your answer.

Task 3:

a) What will happen to the labour-force participation rate if a change in the law states that the definition of unemployment is broadened to include those who are considered to be discouraged job seekers? Explain your answer.

b) The current unemployment rate is 6% and the number of people in the labour force is 450,000. Use this information to find the following.

(i) How many people are unemployed?

(ii) If the working age population is 675,000, what is the labour force participation rate?

(iii) Jamilah, who lives in Perth is a particularly productive waitress and she is often employed given her excellence. Yet for the past 8 months, Jamilah was first downgraded from full-time to part-time hours and lately has even found herself unemployed despite still being a very efficient employee. What does Jamilah’s situation tell you about Australia’s output gap at present, and what does this indicate with respect to the relationship between the actual unemployment rate and the full-employment rate?