Homework 3-

1. Suppose there are 15,000 people living in Madison in 2008. Out of these 15,000 people, 4,000 are either too old to work or too young to work. Of the remaining individuals, 4,000 are employed with full-time jobs; 3,000 are employed part time, but they wish to work full-time; and 2,000 are underemployed, but they are working full-time jobs; 1,000 are currently not working, but they are looking for work; and the remainder of the population are discouraged workers.

a) What is the size of the labor force in Madison in 2008?

b) What is the employment rate in Madison in 2008?

c) What is the unemployment rate in Madison in 2008?

d) What percentage of the population are discouraged workers in 2008?

e) Now suppose that Madison's real GDP is $400,000 in 2008. Madison's mayor recently got the report from UW-Madison's Econ Department saying that 100 people find jobs for every $10,000 increase in the level of output. If the mayor's target unemployment rate for the next year is 7%, what would the change in output need to be? Assume no changes in the number of young and old in the population or in the number of discouraged workers. That is, the amount of people in the labor force is not affected by changes in GDP

f) After the change in the level of output in the question (e), what's the GDP growth rate between 2008 and 2009?

g) Suppose now that people in Madison expect recession to come and hit the city during this next year. Due to this expected recession the people in Madison will decide to (increase, decrease) their rate of saving to be better prepared financially for the recession. Their anticipation might actually make the recession (better, worse). Pick the answer and explain briefly why this is the case.

2. a) Bill is a baker. He makes and sells bread only. To make bread, he needs flour. In 2008, he made 5000 pounds of bread and sold the bread at a price of 10 dollars per pound. To make the bread, he used 3000 pounds of flour which was produced in 2007. He bought the flour he used to bake this bread in 2007 and he paid 5 dollars per pound of flour. Assume there was no inflation between 2007 and 2008. Assume Bill's bread is the only good counted in the measurement of GDP. Given these assumptions calculate GDP for 2008.

b) Suppose in 2011 Bill is still baking and selling bread. That is, Bill bought flour that was produced in 2010. He purchased 3000 pounds of this flour at a price of 5 dollars per pound. Then, he made 5000 pounds of bread in 2011 and sold this bread in 2011. In 2011 Bill sold his bread for 11 dollars per pound. In addition there was 10% inflation between 2010 and 2011. Given this information, calculate GDP for 2011 using 2010 as the base year (that is, measure real GDP in 2011 using 2010 as the base year).

c) Assume that there was no inflation from 2007 to 2011. From the results of (a) and (b), what can you say about the GDPs of 2008 and 2011? Is this economy growing, shrinking, or staying constant?

d) Now, it is 2015. Bill is still baking bread. The income for Bill was $30,000 in 2014. He bought 3000 pounds of flour at the price of 10 dollars per pound in 2014 and then used this flour to produce bread in 2015. Assume the flour was produced in 2014. Then in 2015 Bill made 5000 pounds of bread and sold this bread in 2015. Between 2014 and 2015, there was 5% inflation. If Bill wants to make the same real income in 2015 as he did in 2014, what should the price of his bread be? Assume that the base year is 2014. Also assume that Bill can sell all of the bread he bakes and that his income is equal to his profit he earns when baking and selling the bread.

e) Now it is 2020. Bill decides to use flour produced during 2020 when baking his bread. Joe, the farmer who provides flour to Bill suggests that he will give Bill 3,000 pounds of flour in exchange for 2,000 pounds of bread. Bill accepts this offer. As usual, Bill can produce 5,000 pounds of bread from 3,000 pounds of flour. After providing the farmer with his 2,000 pounds of bread, Bill then sells the remaining 3,000 pounds of bread in the market. The price of flour per pound in 2020 is 10 dollars and the price of bread is 15 dollars per pound. Calculate real GDP for 2020 using 2020 as the base year.

3. Country A's real GDP is growing 5% a year. Country B's real GDP is growing 10% a year. In 2000 Country A's real GDP per person was $20,000 per person, while country B's real GDP per person was $10,000 per person. Assume that population remains constant over time in both countries. In what year will the real GDP of both countries be the same? Hint: you will find the rule of 70 helpful in making this calculation: consult your textbook to read about this rule.