ECON 302: Intermediate Macroeconomic Theory (Spring 2012-13)

Discussion Section Week 1 – January 25, 2013

SOME KEY CONCEPTS

- Accounting the components of GDP
- Nominal GDP, real GDP and the GDP deflator
- Calculating real GDP with Laspeyres, Paasche, Chain-weighted and Fisher indices
- The value-added approach of calculating GDP

EXERCISE
Question 1a (What counts as GDP?)
Consider the economic activities in Neverneverland.
- Mr. A sells aluminum ore he mined to Mr. B for $100.
- Mr. B refines the aluminum ore to sheet aluminum and sells to Mr. C for $200. The refinement process
requires $50 of chemicals imported.
- Mr. C produces a car from sheet aluminum bought and $50 worth of imported intermediate inputs. The
car is not sold but valued in inventory at $300.
What is the contribution to GDP from these economic activities? Write out the value added of each activity.

Question 1b (The puzzle of intermediate goods imports)

Suppose Jane paid $10,000 to a Korean producer to import a car which was produced in Korea and sold it
to John at $12,000. What is the contribution of this deal to GDP in the USA? Explain why this is the case
in terms of national income identity. (Hint: The car is an intermediate good for the service of matching a
foreign car to a domestic consumer.)

Question 2 (Number crunching of nominal and real GDP, the indices and inflation)
We wish to investigate the growth and inflation between 2009 and 2010 of a two-good economy consisting of
Beer and Snowboard. Fill in the following table.
2009 2010
P Q P Q
Beer (Keg) 12 500 14 600
Snowboard (Board) 150 18 125 20
Nominal GDP 8,700 10,900
Real GDP in 2009 Prices 8,700 10,200
Real GDP in 2010 Prices 9,250 10,900
Laspeyres Index -
Paasche Index -
Chain-weighted Index -
Real GDP in chained prices, benchmarked in 2010
Growth in nominal GDP -
Growth in real GDP -
Inflation -

Question 3 (Mathematical practice)

Consider the flow of unemployment, where unemployment fraction of population at time t is denoted by ut .
In each time period t, suppose the employed fraction, 1 ut , loses job at rate and the unemployed fraction,
ut , finds job at rate ↵.
(a) Write the equation for the flow of unemployment at time t + 1, namely, write the equation of ut+1 .
(b) The steady-state unemployment rate is when ut+1 = ut = u. Find the expression of u.
(c) Suppose that it is more likely that the employed fraction loses job, find the expression for the change in
steady-state unemployment rate with respect to .