Internal Code: IAH77
Measuring GDP and Economic Growth
Answer (a) and (b) using the figures in the following table.
(a) What are the values for GDP, wages and supplements and gross fixed capital expenditures? (3 marks)
(b) Calculate the value of net exports.(1 mark)
(c) Explain: ‘Ms Smith diminishes the national income by marrying her cook.’ (1 mark)
An economy produces only three commodities – fish, potatoes and rice. The base year is 2015, and the table gives the quantities produced and the prices.
(d) Calculate chain volume measure of real GDP in 2015 and 2016 expressed in base-year prices. Then, calculate the real GDP growth rate between 2015 and 2016. (5 marks)
Australian Bureau of Statistics reported the following data for June 2017:
Labour force participation rate: 64.9 per cent
Working-age population (in thousands people): 20,429,726
Employment-to- population ratio: 61.3
(e) Calculate the labour force. (2 marks)
(f) Calculate the employment. (2 marks)
In New South Wales in October 2015, the labour force was 3,903,200 and 200,500 people were unemployed. In November 2015, the labour force increased by 1000 and the number employed decrease by 900.
(g) Calculate the unemployment rate in November 2015. (2 marks)
A typical family on Fantasy Island consumes only juice and cloth. Last year, which was the base year, the family spent $80 on juice and $50 on cloth. In the base year, juice was $4 a bottle and cloth was $5 a length. This year, juice is $6 a bottle and cloth is $8 a length.
(h) Calculate the CPI in the current year (2 marks)
(i) Calculate the inflation rate in the current year. What does it indicate on the price level? (2 marks)
MINI CASE: NIKE AND SWEATSHOP LABOR (10 MARKS)
Nike, a company headquartered in Beaverton, Oregon, is a major force in the sports footwear and fashion industry, with annual sales exceeding $ 12 billion, more than half of which now come from outside the United States. The company was co-founded in 1964 by Phil Knight, a CPA at Price Waterhouse, and Bill Bowerman, college track coach, each investing $ 500 to start. The company, initially called Blue Ribbon Sports, changed its name to Nike in 1971 and adopted the “Swoosh” logo—recognizable around the world—originally designed by a college student for $35.
Nike became highly successful in designing and marketing mass-appealing products such as the Air Jordan, the best selling athletic shoe of all time. Nike has no production facilities in the United States. Rather, the company manufactures athletic shoes and garments in such Asian countries as China, Indonesia, and Vietnam using subcontractors, and sells the products in the U.S. and international markets. In each of those Asian countries where Nike has production facilities, the rates of unemployment and under employment are relatively high. The wage rate is very low in those countries by U.S. standards—the hourly wage rate in the manufacturing sector is less than $ 2 in each of those countries, compared with about $ 35 in the United States. In addition, workers in those countries often operate in poor and unhealthy environments and their rights are not particularly well protected. Understandably, host countries are eager to attract foreign investments like Nike’s to develop their economies and raise the living standards of their citizens. Recently, however, Nike came under worldwide criticism for its practice of hiring workers for such a low rate of pay—“next to nothing” in the words of critics—and overlooking poor working conditions in host
Initially, Nike denied the sweatshop charges and lashed out at critics. But later, the company began monitoring the labour practice at its overseas factories and grading the factories in order to improve labour standards. Nike also agreed to random factory inspections by disinterested parties.
1. Do you think the criticism of Nike is fair, considering that the host countries are in dire needs of creating jobs? (4 marks)
2. What do you think Nike’s executives might have done differently to prevent the sensitive charges of sweatshop labour in overseas factories? (3 marks)
3. Do firms need to consider the so-called corporate social responsibilities in making investment decisions? (3 marks)
The United States is likely to Raise Interest Rate soon
The U.S. Federal Reserve chairman, Dr Janet Yellen, has signalled that the United States is likely to increase its interest rate as US economic indicators have improved. On the other side of the world, however, the interest rates in many other countries including the EU, Japan and Australia are on hold at their lowest level ever.
(a) Explain, in the short run, how and why an increase in US interest rate is likely to change the flow of funds between the United States and Japan. (2 marks)
(b) Using a graph, explain how an increase in US interest rate is likely to affect loanable funds supply and interest rate in Australia. Also, analyse how the change in loanable funds supply and home loan interest rate are likely to influence housing demand, house prices, and household debt burden in Australia. (5 marks)
(c) Discuss how and why an increase in US interest rate is likely to affect the value of Australian dollar and exchange rate (depreciation or appreciation) against the US dollar. Also, discuss how the change in exchange rate is expected to influence Australia’s exports, imports and the current account balance (improve or worsen). (3 marks)
Question 3 – 20 marks
Exchange Rate (5 marks)
For each of the following situations, indicate the direction of the shift in the supply or demand curve for domestic currency. (5 marks)
(a) The domestic country’s exports become more popular overseas.
(b) The domestic country experiences a recession while other nations enjoy economic growth.
(c) Inflation rates accelerate in the domestic country, while inflation rates remain constant in other countries.
(d) Real interest rates in the domestic country rise, while real interest rates abroad remain constant.
(e) Tourism from the domestic country increases sharply because of a fare war among airlines.
Economic Growth and Business Cycle (10 marks)
(a) A small economy produced the following final goods and services during the given month: 3 million kilograms of food, 50 000 shirts, 20 houses, 50 000 hours of medical services, one motor car plant and two tanks. Calculate the value of this output at the following market prices (4 marks):
1) $1 per kilogram of food.
2) $20 per shirt.
3) $50 000 per house.
4) $20 per hour of medical services.
5) $1 million per motor car plant.
6) $50 000 per tank.
(b) Mark works part time at Pizza Hut and earn an annual wage of $15 000. He sold 4000 pizzas at $5 per pizza during the year. He was unemployed part of the year, so he received unemployment benefits of $30 000. During the year, Mark bought a used car for $1000, using the expenditure approach, how much has Mark contributed to GDP? (3 marks)
(c) Suppose the economy has been in a recession and everyone is asking when it will recover. To find an answer to the state of the economy’s heath, a television reporter interviews Terence Asaud, a local car dealer. Asaud says, “I do not see any recovery. This year our second quarter sales were down on the first quarter. In the third and fourth quarters we then sold a lot more cars than the second quarter, but sales in both these two quarters are still down on what they were in same quarter last year.” Is Mr. Asaud correct? Are his observations with the peak, recession, trough or expansion phase of the business cycle? (3 marks).
Balance of Payments (5 marks)
The table gives some information about the US international transactions in a year.
(a) Explain and calculate the current account balance. (2 marks)
(b) Explain and calculate the capital account balance. (2 marks)
(c) Was the US a net borrower or a net lender in this year? Explain your answer. (1 mark)
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