Economics

In general each of the components have increased as a percentage of GDP over the last 50 years. Private Investment appears most affected by recessions. A common level around 15% is seen rather than a continued climb in the last 50 years. Military spending clearly peaks in troughs in times of war and peace.

Consider an economy that produces and consumes bread and automobiles. In the following table are data for two different years:

| Year 2000 | Year 2010 |

Good | Quantity | Price | Quantity | Price |

Automobiles | 100 | $50,000 | 120 | $60,000 |

Bread | 500,000 | $10 | 400,000 | $20 |

a. Using the year 2000 as the base year, compute the following statistics for each year:

* nominal GDP

* 2000= (100*$50000)+(500000*$10)=$10000000

* 2010= (120*$60000)+(400000*$20)= $8000000

* real GDP

* 2000=$10000000

* 2010= (120*$50000)+(400000*$10)= $6400000

* the implicit price deflator for GDP (the GDP deflator)

* 2000= 1

* 2010= ($8000000/$6400000)*100= 1.25

* a fixed-weight price index such as the CPI

* 2000= 100

* 2010= ($60020/$50010)*100= 120

b. What was the inflation rate between 2000 and 2010? Compare the results obtained using the GDP deflator and the CPI.

GDP: 1.25-1= 25%

CPI: 120-100= 20%

Suppose that an economy’s production function is Cobb-Douglas with parameter α=0.3.

a. Calculate the fractions of income that capital and labor receive.

* Labor receives 30% and capital receives 70%.

b. Suppose that immigration increases the labor force by 10 percent. What happens to total output (in percentage)? What happens to the real wage (in percentage)? Explain the results you obtain intuitively.

* Output increases by 10 percent. This is because Cobb-Douglas assumes no scaled economies. The real wage should expect to fall, higher production would likely also include higher inflation. This would increase the denominator in the real wage equation.

c....