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GENERAL ECONOMICS
REINFORCEMENT WORKSHOP 2017-02

1. CASE: Main macroeconomic aggregates

If private consumption is 30 million soles, current expenditure is 10 million soles, private
investment is 8 million soles, taxes are 1 million soles and public investment is 2 million
soles, we can say:

a. That there is a fiscal surplus

b. That the GDP is :
Rpta:
a. It is well known that fiscal surplus: tax > expenditure

Tax = 1 million soles current expense = 10 million soles

Tax < current expense

It can be stated that there is a fiscal deficit.

b. PBI: Y= C+S+T Y= C+I+G+X - M

C = private consumption 30 million soles

G = current expense 10 million soles
I = private investment 8 million soles
I = public investment 2 million soles
T = taxes 1 million soles

Y= C+I+G+X - M
Y = 30 + 10 + 8 + 2
Y = 50

2. CASE:
If the following table is presented with data on the value of the basket for three years (2008,
2009, 2010), where the base year is 2008, calculate:

Year Value of the basket S/.

2008 200
2009 230
2010 250

a. The CPI for each year

b. The inflation rate for 2009 and 2010

Rpta:
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a. With CPI 2008 = 100 (base year)

230
CPI 2009 = x100 = 115
200

250
CPI 2010 = x100 = 125
200

b. The inflation rate for 2009 and 2010

inflation rate 2009 = C(
CI-1x100 =115-100x100=15%
IPcT-1 100
inflation rate 2010 = c(P-I
c -1x100 = 125115x100 = 8.7%.
IP cT-1 115 .

3. CASE:
If the value of sales of goods abroad is US$18 million, purchases from foreign companies
are US$28 million, IGV is US$3.24 million and income tax is 30%, net exports are:

X = foreign sales 18 million

M = purchases from foreign 28 million
companies

T = IGV 3.24 million

T = income tax 30%, net exports = 30% x (18-28)

Net Exports = (X - M) = 18 - 28 = - 10 million dollars

Trade deficit is said to exist

4. CASE:
Unemployment is one of the major macroeconomic problems, research and give an
example of the types of unemployment:

Unemployment is a serious economic, social and personal problem for two main reasons:
•
Loss of production and income.
•
Loss of human capital.

Loss of production and income The loss of a job results in an immediate loss of income and
production. These losses are devastating for the people who bear them and make
unemployment a frightening situation for everyone. Unemployment insurance offers some
protection, but does not provide the same standard of living that could be achieved by having a
job.
Loss of human capital Prolonged unemployment can permanently damage an individual's
employment prospects. For example, a manager loses his job when his employer downsizes the
company. If you have an urgent need for income, you can become a cab driver. After a year in
this job, he discovers that he cannot compete with recent MBA graduates.

Eventually he may be rehired as a manager, but in a small company and at a low salary. It
has lost part of its human capital.
The costs of unemployment are unevenly distributed, making unemployment both a
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political and an economic problem.

Unemployment is classified into three types according to its causes. They are:
- By friction. is unemployment arising from normal labor turnover, i.e., people
entering and leaving the labor force and the daily creation and destruction of jobs.

- Structural. is unemployment that arises when changes in technology or international

competition change the skills needed for jobs or change the location of jobs.
For example, when a steel plant in some city is automated, some jobs are
destroyed in that city. Meanwhile, new jobs are being created
of security guards, life insurance salesmen and retail counter clerks in other cities.
Former steelworkers are unemployed for several months until they move on,
retrain and get one of these new jobs. Structural unemployment is painful,
especially for older workers for whom the best option is to retire early or take a
less skilled, lower paying job.

- Cyclical. is unemployment that fluctuates during the economic cycle. Cyclical

unemployment increases during a recession and decreases during an expansion.
An auto worker who is laid off because the economy is in recession, and who is
rehired a few months later when the expansion begins, experiences cyclical
unemployment.

5. CASE:
The following table shows some of the transactions carried out in the economy.
Identify which are recorded in GDP and if so, write in the GDP column whether it is
recorded as Consumption (C), Investment (I), Government Expenditure (G), Exports (X)
or Imports (M).

Transactions carried out in 2016 PBI

Maria buys a new apartment valued at S/. 240,000 I
G
The State pays S/. 200 million in salaries for teachers at national schools
Don Mamino bakery buys 200 kg of flour for which it pays S/. 500 I
Pepe buys a plane ticket on La Tam from Lima to Cuzco. C
Government spends additional 100 million on the 65 pension G
330 million in raw material exports to China X
Pedro sells his 1996 Toyota, for which he receives S/. 33,500 Y

6. CASE:
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The following employment statistics are available:

Total population: 31 million people
EAP: 16 million people
Employed: 15 million
Working-age population represents 60% of the total population.

Calculate:
a. Unemployment rate
b. Activity rate
Rpta:

a.
# people disengaged
unemployment rate = x100%
workforce
where labor force: number of employed persons + number of unemployed
persons
For the case of Peru the labor force = EAP

unemployment x100% 6.25%

rate (16 - 15)
16

b.
workforce
activity rate = x100%
working-age population
16
activity rate = x100% = 86.02%
7. CASE:
Only four final goods are produced in a country: A, B, C and D. The quantities produced and
prices for three years are shown in the following table:

Goods Year 0 Year 1 Year 2

Quantity Price Quantity Price Quantity Price
A 400 40 440 44 460 50
B 1200 30 1060 36 1220 40
C 120 60 140 56 140 60
D 1600 80 1620 90 1640 88

Using year 0 as a base.

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a. Calculate the nominal gross domestic product and the real gross domestic product for each one.
of the years, why in year 0 do both coincide?
Nominal GDP
Goods Year 0 Year 1 Year 2
Quantity Price total Quantity Price total Quantity Price total
A 400 40 16000 440 44 19360 460 50 23000
B 1200 30 36000 1060 36 38160 1220 40 48800
C 120 60 7200 140 56 7840 140 60 8400
D 1600 80 128000 1620 90 145800 1640 88 144320
187200 211160 224520

Real GDP
Goods Year 0 Year 1 Year 2
Quantity Price total Quantity Price total Quantity Price total
A 400 40 16000 440 40 17600 460 40 18400
B 1200 30 36000 1060 30 31800 1220 30 36600
C 120 60 7200 140 60 8400 140 60 8400
D 1600 80 128000 1620 80 129600 1640 80 131200
187200 187400 194600

b. Calculate the growth rates of nominal GDP and real GDP in years 1 and 2. Why do the two rates
differ from each other?

The economic growth rate is the percentage change in the quantity of goods and services produced
by an economy from one year to the next. The following formula is used to calculate the economic
growth rate:
economic growth rate
(this year's real GDP - last year's real GDP)
x100
Last year's real GDP

growth rate (nominal GDP year 1) = x100 = 12.8%

(211160 - 187200)
187200

(224520 - 187400)
percentage change (PBInominal year 2) = x100 = 19.8%
percentage change (PBIreall year 1) x100 = 0.10%
(187400 - 187200)
187200

(194600 - 187400)
percentage change (PBIreall year 1) = x100 = 3.8%
c. Calculate the real GDP per capita for year 1 and year 2 knowing that the population was 10,000
and 12,000, respectively.
(187400)
(real GDP per capita year 1) = = 18.74
(194600)
(real GDP per capita year 2) = = 16.21
d. Calculate the GDP deflator for year 1 and year 2.
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Nominal GDP
Deflator year 1 = x100
Real GDP
Deflator year 1 = 211160 x100 = 112.7%.
187400

Nominal GDP
Deflator year 2 = x100
Real GDP
224520
Deflator year 2 = x100 = 115.4%
194600

8. CASE:
According to what you have learned, mention if it is true or false and explain why:
1. If a government collects more in taxes than it spends, it suffers a government budget deficit .
Rpta:
A government budget surplus is known to exist when a government has more revenue (mainly
taxes) than it spends. If a government spends more than its revenues, then it is said to suffer
from a government budget deficit.

Taxes (greater than) expenditure = fiscal surplus

Taxes (less than) expenditure = fiscal deficit
Taxes (equal) expenditure = fiscal balance

(F) If the government collects more than it spends, it is said to have a government budget
surplus.

2. A macroeconomic policy challenge is to keep inflation low.

Rpta: (V) Currently, the challenges of macroeconomic policy are fivefold: stimulate economic
growth, maintain a low level of inflation, stabilize the economic cycle, reduce unemployment
and reduce government and external deficits.

To meet these challenges, there are instruments divided into two main categories:

Fiscal policy Monetary policy

‐ Tax changes ‐ Modify interest rates
‐ Changes in the program of expenditures ‐ Modify the amount of money in the
of the economy
Government ‐ Shares under control of the BCRP
‐ Shares under government control

3. GDP is the value of the production of final goods and services by nationals, regardless of their
physical location.
Rpta: (F) that is the definition of GNP (gross national product) GDP is the value of the output of
final goods and services produced in a country during a certain period of time regardless of
nationality.

4. GDP accurately determines the change in economic welfare

Rpta: (F) Economic welfare depends on many other factors that real GDP does not measure
accurately or at all. For example, externalities

Economic well-being is a comprehensive concept that attempts to reflect the general state of a
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society's economic situation. Economic welfare improves when the production of all goods and
services grows. The goods and services that make up the real GDP growth rate are only a part
of all the aspects that influence economic welfare Does this real GDP growth provide a
complete and accurate measure of the change in economic welfare?
No, it does not. The reason is that economic welfare depends on many other factors that real
GDP does not measure, or does not measure accurately.
Some of these factors are:
‐ Overadjustment for inflation.
‐ Home production.
‐ Subway economic activity.
‐ Health and life expectancy.
‐ Free time.
‐ Environmental quality.
‐ Political freedom and social justice.

5. Nominal GDP only increases when the physical quantities of goods and services produced by
the country increase.
Rpta: (F) Nominal GDP can also increase in the face of price increases.

6. Intermediate products are those that are manufactured with a technology that is not state-of-
the-art.

Rpta: (F) Intermediate products are those that a company buys from other companies to be
used in production.

7. GDP per capita is calculated as the quotient between gross domestic product and the
economically active population.
Rpta: (F) Gross domestic product per capita is the ratio of GDP to total population of a country.

8. Students and housewives are considered economically active because they perform labor that
requires effort.
Rpta: (F) They are part of the inactive population since they have decided to engage in a non-
remunerated activity.

9. If we subtract indirect taxes from the GDP, we obtain the net GDP.
Rpta: (F) To obtain the net GDP, depreciation must be deducted from the GDP.

10. Each economic cycle has two stages and two turning points
Rpta: (V)

Stages Points of change

Recession Peak
Period during which real GDP declines It occurs when an expansion ends and a
(negative growth rate) for at least two recession begins.
successive quarters.
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Expansion Valley
Period during which real GDP increases It occurs when a recession ends and an
expansion begins.

11. What is the condition that must be met to say that there is hyperinflation?
Rpta: When the inflation rate exceeds 50% per month.

12. Why is the inflation rate a problem?

Rpta: Because the sustained and often unforeseeable increase in magnitude, apart from
causing losses in economic efficiency, redistributes income and wealth in a regressive manner,
affecting mainly the poorest people.

13. What is the difference between ¨flows¨and ¨acerves¨?

Rpta: A flow is a quantity per unit time. For example: GDP, savings, investment.

It is known that acquis is the quantity that exists at a given time. e.g. wealth and capital.
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14. What are the three sources of investment financing?
Rpta: Private savings, budget surplus and indebtedness with the rest of the world.

Recall that the Expenditure Approach is a way of measuring GDP that consists of>
Y= C+S+T Y= C+I+G+X - M
Equalizing:
I+G+X- M = S+T
I = S + (T-G) + (M-X) Where (T-G) is the surplus and (M-X) is the debt with
the rest of the world National savings: (S) + (T-G)

15. Would the GDP deflator be an alternative indicator to measure the cost of living?
Rpta:

It is known that deflation is the decrease in the price level (negative inflation) and if inflation is
measured with the deflator, we measure the variation of all prices included in the GDP. While,
when measuring inflation with the CPI, we measure the inflation that affects the basic consumption
basket.

Then the answer is No, since it includes a series of goods and services that are not intended for
consumption, such as capital goods.

16. GDP is measured at ................... Euros or any currency

17. Nominal GDP differs from real GDP in that: .................. The former is measured in current prices,
the latter in constant prices.

18. Aggregate output measured at market prices differs from aggregate output measured at factor
cost in that: ........................ The former includes indirect taxes, while the latter does not.

19. GNP differs from GDP in that the former includes: ............ Depreciation.

20. The economically active population is made up of: ..................... Those who are old enough to work
and want to work

21. The unemployment rate can be defined as the percentage represented by: ........... Unemployed in
the working age population

Remember that the unemployment rate is the number of unemployed persons expressed as a
percentage of all persons who are employed or seeking employment.

# unemployed persons
unemployment rate = x100
workforce
where labor force: number of employed persons + number of unemployed persons

For the case of Peru the labor force = EAP

22. The unemployment rate can be expressed by multiplying: -------- the frequency of the
unemployment by average duration of unemployment
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9. CASE: full employment, labor market and GDP potential

What is the difference between nominal and real wages? Does increasing the minimum wage to 900
soles ensure improved family welfare? Explain

Nominal wage rate Wage measured in monetary units earned for an hour or day's work.

Real wage rate The amount of goods and services that a unit of labor can buy. It is equal to the nominal
wage rate divided by the price level.

10. CASE:
Why is it said that the CPI is not an accurate indicator for calculating inflation?

Rpta:
Inflation being the increase in the general level of prices in the economy (a measure of the total cost of
goods and services purchased by an average consumer), the CPI is the average measure of prices
based on a weighted basket of consumer goods and services.

In this sense, if inflation is measured with the CPI, we measure the inflation that affects the basic
consumer basket.
On the other hand, if measured with the deflator, we measure the variation of all prices including GDP.

11. CASE:

An Apple iPod cost 275 soles in 2000 and 300 soles in 2008. The average salary in the manufacturing
industry was 750 soles per month in 2000 and 950 soles per month in 2008. Assume that the workweek
has 45 working hours:
a. By what percentage did the price of an iPod go up?
b. By what percentage increase in salary?
c. How many minutes does a worker have to work each year to earn enough to buy an Apple-branded
iPod?
d. Did workers' purchasing power increase in iPods?

12. CASE:
In 2012, the French economy produced 240 baguette loaves and sold them for 0.75 cents each. In 2015,
it produced 480 loaves of bread and sold them for 0.25 cents each. Calculate the nominal GDP, real
GDP and GDP deflator for each year (2012 base year).
Finely. by what percentage do prices increase from one year to the next?

Year 2012 Year 2015

Produces 240 loaves Produces 480 loaves
Sells at 0.75 cents each Sells at 0.25 cents each

Nominal GDP
Year 2012 Year 2015
Quantity Price total Quantity Price total
240 0.75 180 480 0.25 120
Real GDP
Year 2012 Year 2015
Quantity Price total Quantity Price total
240 0.75 180 480 0.75 360

Nominal GDP
Deflactor year 2012 = x100
Real GDP
Deflator year 2012 = 0.75x100 = 100%.
0.75
Deflator year 2015 = 120 x100 = 33.33%.
360
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Deflator
Nominal GDP 180 120
Real GDP 180 360
Index 100 33.33

(360 - 180)
percentage change (PBIreall year 2015) = x100 = 100%
Deflator Inflation
Base Year Year 2015
(2012)
Index 100 33.33
Inflation 33.33-100

13. CASE:
Only two goods are consumed in a market, as shown below:

Shoes Stockings Pants

2011 prices 100 5 50
Amount for 2011 100 100 200
2012 prices 100 8 100
2012 Amount 100 100 200

a. What is the percentage change for each of the assets? Do socks become more expensive or
cheaper than pants?
b. Does consumer welfare vary?
c. Using 2011 as the base year, calculate the CPI for 2011 and 2012 and the inflation rate from one
year to the next.

Rpta:
(8-5)
a. percentage change (averages) = x100 = 60%
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(100 - 50)
percentage change (pants) = x100 = 100%
b. The most affected welfare is that of consumers who buy pants, as there has been a 100% price
increase compared to last year.

c. Where CPI 2011 = 100 (base year)

(100x100)+(100x8)+(200x100)
x100 = 150.24
CPI 2012 = (100x100) + (100x5) + (50 x200)
Year 2011 Year 2012
Price Quantity Price Quantity
Shoe 100 100 100 100
Media 5 100 8 100
Pants 50 200 100 200

IPC Year 2011 Year 2012

Value of Consumer Bs PoxQo P1xQo
100x100 100x100
5x100 8x100
50x200 100x200
Value (sum) 20500 30800
Index 100 30800 20500x100
150.24

inflation rate 2012 = C (-P

C(1x100 =(50100x100 =50%
IP C T-1 100

CPI inflation Year 2011 Year 2012

index 100 150.24
150.24 - 100
Inflation x100x
100
50.24

14. CASE:
Calculate Nominal GDP, Real GDP, CPI, Deflator, Inflation
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Base Year Year 1 Year 2

Goods Price Quantity Price Quantity Price Quantity
Good 1 2 10 3 12 4 12
(consumption)
Asset 2 1 15 1 15 1.5 15
(consumption)
Asset 3 5 4 6 4.5 6 5
(consumption)

Nominal GDP PoxQo P1xQ1 P2xQ2

2x10 3x12 4x12
1x15 1x15 1.5x15
5x4 6x4.5 6x5
Nominal GDP (sum) 55 78 100.5

Real GDP PoxQo PoxQ1 PoxQ2

2x10 2x12 2x12
1x15 1x15 1x15
5x4 5x4.5 5x5
Real GDP (sum) 55 61.5 64

IPC PoxQo P1xQo P2xQo

Value of consumer Bs 2x10 3x10 4x10
1x15 1x15 1.5x15
Value (sum) 35 45 62.5
45 35x100 62.5
index 100.00
128.57 35 x100

178.57

Deflator PoxQo P1xQo P2xQo

Nominal GDP 55 78 100.5
Real GDP 55 61.5 64
55 55x100 78 100.5 x100
index 64
100.00 x100
61.5 157.03
126.83

CPI inflation Base Year Year 1 Year 2

Index 100 128.57 178.57
Inflation 28.57 178.57 - 128.57
x100
128.57
38.89

Deflator Inflation Base Year Year 1 Year 2

Index 100 126.83 157.03
Inflation 26.83 157.03 - 126.83
x100
126.83
23.81
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15. CASE:

Base Year 2006 Year 2007

Goods Price Quantity Price Quantity
Orange 2 10 2 10
Bread 3 15 4 15
Chicken 7 8 7.5 8

Nominal GDP PoxQo P1xQ1

2x10 2x10
3x15 4x15
7x8 7.5x8
Nominal GDP (sum)

Real GDP PoxQo PoxQ1

2x10 2x10
3x15 3x15
7x8 7x8
Real GDP (sum)

IPC PoxQo P1xQo

Value of consumer Bs 2x10 2x10
3x15 4x15
7x8 7.5x8
Value (sum) 121 140
index 100.00 140 121x100
115.7

CPI inflation Base Year Year 1

Index 100 115.7
Inflation 15.7

16. CASE:
According to the theory, support your answer:
1. Explain what is the minimum wage?
Rpta: It is the lowest wage at which a company can legally hire workers, set by the
State of each country.
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Remember that the efficiency wage is granted to people who are more productive for the
company, generating imbalances in the labor market (no hiring, unemployment, etc.).

2. Why does the economy experience unemployment even at full employment?

Rpta:
Unemployment is always present in the economy, even when it is at its potential level,
due to the existence of a period of time for job search or job rationing.

According to the classical model, it is still at full employment for two reasons:
- Job search, people looking for a better job
- Employment rationing: the market rations jobs

3. If the price of a Metropolitano bus (domestically produced) goes up, what affects the CPI
or the GDP deflator more?
Rpta:

Remember that the CPI is found by dividing the value of the basket for the period (current
year) by the value of the basket in the base year, multiplied by 100.

IPC x100
(V canasta)
(V canastabase)
The family
basket is the set of goods and services most frequently purchased by households.

One measure of the price level (apart from the CPI) is the GDP deflator, which is the
average of current year prices expressed as a percentage of base year prices. The Deflator
is an aggregate index of prices of everything produced in an economy, while the CPI refers
only to consumer goods.
Nominal GDP
Deflator = x100
Real GDP
So, it affects more the GDP deflator, because it does not belong to the basket of goods
and services produced in the country.