Managerial Economics – Tutorial – Measuring National Output

Hint: Tutorial questions are comprehensive. However, the respective lecturers should utilize
the questions based on the depth of the knowledge acquisition by students.

Essay Analytical Questions

1. Suppose that your economics professor spent a week in Moscow delivering a series of lectures
sponsored by the Russian government and a Russian professor spent a week in the U.S. delivering
a series of lectures sponsored by your university. How would each of these events be reconciled
in the U.S. and Russian GDP and GNP accounts?

2. Briefly explain under what condition, if any, net investment can be negative. If so, explain what
this implies about the capital stock.

3. Using the above figures, compute the subtotals for each of the four major spending categories
and label them. Then compute the value of GDP.
4. Explain why each of the following items is excluded from GDP: (a) profits from the stock and
bond market (b) transfer payments (c) sale of used goods (d) goods and services produced in the
home.
Explain why the following items are included in GDP: (a) depreciation (b) change in business
inventories (c) indirect taxes

5. Explain why real GDP may only rise even when the prices of large number of goods in the
economy have fallen dramatically.

6. Explain how using GDP may not be a very good measure of overall social welfare.

7. What might happen to the official unemployment rate if unemployment compensation were
eliminated? Explain your answer.

8. Explain how the unemployment rate can drop even if the total number of people with and
without jobs remains constant.

9. Suppose there are 10 million unemployed out of a labor force of 100 million. This means an
unemployment rate of 10/100 = .10, or 10 percent. Recalculate the unemployment rate if 1 million
of these 10 million unemployed workers stop looking for work.

10. Suppose there are 10 million unemployed out of a labor force of 100 million. This means an
unemployment rate of 10/100 = .10, or 10 percent. Recalculate the unemployment rate if 1 million
previously discouraged workers re-enter the workforce and start looking for work but don’t
immediately find employment.

11. List and explain the three major types of unemployment.

12. Suppose you want to earn a 7% rate of return on a one-year loan you are about to make and
the expected inflation rate for the duration of the loan is 5%. How much interest should be charged?

Secondly, suppose that your forecasts are 2% below the actual level. What would happen to your
real rate of return? What if you overestimated inflation by 2%.

13. Lenders and borrowers expect the inflation rate to equal the actual inflation rate. The consumer
price index is 110 in year 1 and 126.5 in year 2. If the interest rate charged by Richie Rich in year
2 is 40%, what is Rich's real interest rate?