Question

Suppose that data below corresponds to the small nation of Collegeville with a population of 3,200 people. Of the 3,200 residents 689 are under 16 years of age, and 349 are institutionalized adults. Of the remaining residents, 451 are without jobs and have given up searching for a job, 240 do not have a job, but are actively seeking work, 351 work part ­time, and the rest work full time. Over the years, the natural rate of unemployment has been found to be 8%. In 2018 the Cost of the Market Basket was $2,340.00. In 2019 the Cost of the Market Basket was $2,855.00. In 2020 the Cost of the Market Basket was $3,230.00.

(Table 1) National Income Accounting latest year data for Collegeville
Consumption of Durable Goods $800,000
Consumption of Nondurable Goods $650,000
Compensation of Employees $565,000
Consumption of Services $1,150,000
Fixed Residential Investment $200,000
Corporate Profits $120,000
Fixed Nonresidential Investment $600,000
Consumption of Fixed Capital $60,500
Change in Inventories $300,000
Government Purchases of Goods and Services $1,200,000
Exports $300,000
Imports $70,000
CALCULATING GDP
1. According to the information provided in the GDP background information handout, a) what are the 4 categories of the expenditures approach? b) how are these categories used to calculate GDP? (8 points)
2. According to table 2 in the GDP background information handout, what are the subcategories of Personal Consumption Expenditures? (8 points)

3. According to table 2 in the GDP background information handout handout, what are the subcategories of Gross Private Domestic Investment? (8 points)

4. Use the data provided in Table 1 (above), to calculate (show your work) the following macro aggregates: a) Personal Consumption Expenditures, b) Gross Private Domestic Investment, c) Net Exports, d) Government Purchases of Goods and Services, e) GDP using the expenditure approach & f) GDP per Capita. (18 points)

CALCULATING INFLATION & UNEMPLOYMENT
5. Collegeville economists have been using 2018 as their base year to calculate inflation.

a) What is the CPI during the base year (2018)? b) What is the CPI for 2019? c) What is the CPI for 2020? (12 points)

6. Calculate the rate of inflation for Collegeville between the base year (2018) and 2019? In other words, what was the rate by which prices increased between those years. Round the percentage to one decimal place; that is, 4.36% is 4.4%. (8 points)

7. Calculate the rate of inflation for Collegeville between 2019 and 2020? In other words, what was the rate by which prices increased between those years. Round the percentage to one decimal place; that is, 4.36% is 4.4%. (8 points)

8. How many discouraged workers does Collegeville currently have? Is this group considered to be in the Labor Force? Why or why not? (6 points)

9. Calculate the unemployment rate for Collegeville. Round the percentage to one decimal place; that is, 4.36% is 4.4%. (6 points)

10. Once you have calculated the current unemployment rate in Collegeville, what is the corresponding “employment rate”. In other words, which proportion of the labor force is considered employed? (6 points)

11. Explain the relationship or connection between the Natural Rate of unemployment and the concept of Full Employment? (8 points)

12. According to the data, is the economy of Collegeville performing at, above or below full employment? Explain. (4 points)

Answer 1

a) The 4 categories of the expenditures approach are Personal Consumption Expenditures, Gross Private Domestic Investment, Government Purchases of Goods and Services, and Net Exports.

b) These categories are used to calculate GDP by adding up the total value of all goods and services produced in a country during a given period of time. Personal Consumption Expenditures include spending on durable and non-durable goods and services by households. Gross Private Domestic Investment includes spending on fixed investments such as construction and equipment, and changes in inventories. Government Purchases of Goods and Services include spending by the government on goods and services. Net Exports are calculated by subtracting imports from exports. GDP is calculated by adding up all of these categories.

The subcategories of Personal Consumption Expenditures include Consumption of Durable Goods and Consumption of Nondurable Goods.

The subcategories of Gross Private Domestic Investment include Fixed Residential Investment, Corporate Profits, Fixed Nonresidential Investment, and Consumption of Fixed Capital.

a) Personal Consumption Expenditures = Consumption of Durable Goods + Consumption of Nondurable Goods + Consumption of Services = $800,000 + $650,000 + $1,150,000 = $2,600,000

b) Gross Private Domestic Investment = Fixed Residential Investment + Corporate Profits + Fixed Nonresidential Investment + Change in Inventories = $200,000 + $120,000 + $600,000 + $300,000 = $1,220,000

c) Net Exports = Exports - Imports = $300,000 - $70,000 = $230,000

d) Government Purchases of Goods and Services = $1,200,000

e) GDP using the expenditure approach = Personal Consumption Expenditures + Gross Private Domestic Investment + Net Exports + Government Purchases of Goods and Services = $2,600,000 + $1,220,000 + $230,000 + $1,200,000 = $5,350,000

f) GDP per Capita = GDP / Population = $5,350,000 / 3,200 = $1,668.75

a) CPI during the base year (2018) = Cost of the Market Basket / Cost of the Market Basket (base year) = $2,340.00 / $2,340.00 = 1

b) CPI