1) Assume there is a simple economy where people consume only 2 goods, food and clothing. Further assume that the market basket of goods used to compute the CPI consists of 100 units of food and 20 units of clothing.

	Food	Clothing
2004 price per unit	$8	$20
2005 price per unit	$12	$40

 

2005. Compute the percentage changes in the price of food and the percentage change in the price of clothing between 2004 and 2005.

Food

=     $12 – $8   × 100% = 50%

8

 

Clothing

= $40- $20 × 100% = 100%

$20

2005. Calculate the percentage change in the CPI between 2004 and 2005.

The percentage change in the total market basket (food and clothing) for the year 2004 and 2005 are as follows.

In 2004, the cost for food and clothing is computed as:

(100 units × $8) + (20 units × $ 20) = $1200

In 2005, the cost for food and clothing is computed as follows:

(100 units $ 12 units) + (20 units $40) = $2000

Therefore, the percentage change (increase) in CPI is 66.7% whereby;

$2000 – $1200 × 100% = 66.7%

$1200

1. Do you think the CPI price changes affect all consumers in the economy to the same extent? Explain.

No, it did not affect all consumers to the same extend. From the data computed, the price of clothing increased more than that of the food. Therefore, individuals who purchase large quantity of clothing and less quantity of food were made worse off than those who bought more of food and less of clothing.

2) Calculate how much each of the following items is worth in terms of today’s dollars using 180 as the price index for today.

1. In 1925, the CPI was 18 and the price of a movie ticket was $0.30.

2015 price = 1925 price × 2015 CPI (Welch, & Welch, 2009)

1925 CPI

 

=   $0.30× 180   = $3

18

1. In 1930, the CPI was 14 and a cook earned $20 a week.

2015 price = 1930 price × 2015 CPI

1930 CPI

 

=    $20 ×180   = $257.14

14

1. In 1940, the CPI was 16 and a gallon of gas cost $0.20.

2015 price = 1940 price × 2015 CPI

1940 CPI

 

=      $0.20 ×180    = $2.25

16

3. The table below uses data for 3 hypothetical countries. All the number values are in thousands. Complete the blank entries in the table below.

Country	Adult Population	Labor Force	Employed	Unemployed	Unemployed Rate	Labor-Force Participation Rate
A	120,000	64,500	60,000	4,500	6.98	53.75
B	46,667	28,000	25,000	3,000	10.71	60
C	70,000	40,000	36,000	4,000	10	57.14

 

A

Labor force = employed + unemployed

60,000 + 4,500 = 64,500

Unemployment rate = number of unemployed persons × 100% (Welch, & Welch, 2009)

 

Labor force

 

4,500 × 100 = 6.98%

64,500

Labor-Force participation rate = labor force      × 100%

Adult population

 

 64,500 ×100% = 53.75%

120,000

B

Labor force = employed + unemployed persons

Employed = 28,000 – 3,000 = 25,000

Unemployment rate = 3,000 × 100% = 10.71%

28,000

 

Adult population = 28,000    = 46,667

0.6

 

C

Number of unemployed person = unemployment rate × labor force

= 0.1 × 40,000 = 4,000

Employed persons = labor force – unemployed

40,000 – 4,000 = 36,000

Labor- Force participation rate = 40,000 × 100% = 57.14%

70,000

 

4. The following table indicates U.S. real GDP data. Calculate real GDP per person for 1987 and 2005. Then use real GDP per capita to compute the percentage change in real GDP per person from 1987 to 2005.

Year	Real GDP (2000 prices in millions)	Population (in millions)
1987	$6,435,000	243
2005	$11,092,000	296.6

 

 

Real GDP 1987 per person = $6,435,000

243

 

= $26,481.48

 

Real GDP 2005 per person = $11, 092,000

296.6

 

=$37,397.17

 

Percentage change = 2005 – 1987 × 100%

1987

 

37,397.17 – 26,481.48 ×100%

26,481.48

 

= 41.22%

 

References

Welch, P. J., & Welch, G. F. (2009). Economics: Theory and practice. Hoboken, N.J: Wiley.

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