Economics 101b: Fall 2001: Problem Set 1

J. Bradford DeLong
delong@econ.berkeley.edu

Pawel Dyczewski
pawel@econ.berkeley.edu


1. Explain whether or not and why the following items are included in the calculation of GDP:

A. Declines in business inventories
B. The fees earned by real estate agents on selling existing homes
C. Social Security checks written by the government
D. Purchase of a new aircraft carrier by the Department of Defense
E. Rent that you pay to your landlord
F. Purchases of American-made trucks by foreign residents

2. Do you calculate real GDP by dividing nominal GDP by the price level or by subtracting the price level from nominal GDP?

3. Do you calculate the real interest rate by dividing the nominal interest rate by the price level or by subtracting the inflation rate from the nominal interest rate?

4. Are your answers to 2 and 3 the same? Since both sets of calculation aim to transform a real into a nominal quantity, shouldn't they be calculated in a parallel fashion?

5. In 1979 the (short-term) nominal interest rate on three-month Treasury bills averaged 10.0%, and the GDP deflator rose from 50.88 to 55.22. What was the annual rate of inflation in 1979? What was the real interest rate in 1979?

a. Were real interest rates higher in 1979, or in 1998 (when the (short-term) nominal interest rate on three-month Treasury bills was 4.8%, and the inflation rate was 2.6%?
b. Which interest rate concept--the nominal interest rate or the real interest rate--do lenders and borrowers care more about? Why?

6. Suppose that the appliance store buys a refrigerator from the manufacturer on December 15, 2003 for $600, and that you then buy that refrigerator on January 15, 2004 for $750. a. What is the contribution to GDP in 2003? b. How is the refrigerator accounted for in the NIPA in 2003? c. What is the contribution to GDP in 2004? d. How is the refrigerator accounted for in the NIPA in 2004?

6. What do economists mean when they say that it is time to "build a model" of a situation or a problem?

8. Write down four metaphors that you have heard people use in talking about the economy that are now--or were at the time--obscure to you.

9. In what sense can a line on a graph "be" an equation?

10. What are the principal flaws in using GDP per worker as a measure of material welfare? Given these flaws, why do we use it anyway?