University of British Columbia

Econ 102
Tutorial 2

The table below shows the answers given by interviewees to the Labour Force Survey:

Person A Now that kids are in school full-time, this person is looking for work and has been interviewed
for three jobs over the past 2 weeks.

Person B This person has been laid off but expects to be called back in a few weeks, just as soon as the
economy improves.

Person C This person has just graduated from university and will start a new job in 8 weeks. In the
meantime, this person is surveying local drinking establishments.

Person D This person was laid off last year when new equipment at the plant reduced the number of jobs.
Since his layoff, this person has been constantly job searching.

Person E This economics graduate is working two nights a week at the 7-11, but wants full-time work as
an economist.

1) Which person in the above table is frictionally unemployed?

A) A
B) B
C) C
D) E
E) none of them
Answer: A

2) Which person is structurally unemployed?

A) A
B) B
C) C
D) D
E) none of them
Answer: D

3) Which person is cyclically unemployed?

A) A
B) B
C) C
D) D and B
E) A and C
Answer: B

4) Which person is NOT included in the calculation of the natural unemployment rate?
A) A
B) B, C and E
C) B only
D) B and D
E) A
Answer: B

5) In calculating GDP, economists use the value of final goods and services because
A) by using final goods and services, they avoid double counting.
B) final goods can be exported to other countries.
C) intermediate goods are imported from other countries.
D) GDP is underestimated if intermediate goods are used instead.
E) none of the above.
Answer: A

6)

Quantities 2008 2009

Bananas 800 bunches 900 bunches
Coconuts 400 bunches 500 bunches

Prices 2008 2009

Bananas $2 a bunch $4 a bunch
Coconuts $10 a bunch $5 a bunch

Tropical Republic produces only bananas and coconuts domestically. The base year is 2008, and the table
above gives the quantities produced and the prices in 2008 and 2009.

a. Calculate Tropical Republic’s nominal GDP in 2008 and 2009.

In 2008, nominal GDP is $5,600. In 2009, nominal GDP is $6,100.

Nominal GDP in 2008 is equal to total expenditure on the goods and services produced by Tropical
Republic in 2008. Expenditure on Tropical Republic on bananas is 800 bunches of bananas at $2 a
bunch, which is $1,600. Expenditure on coconuts is 400 bunches at $10 a bunch, which is $4,000.
Total expenditure is $5,600, so nominal GDP in 2008 is $5,600.

Nominal GDP in 2009 is equal to total expenditure on the goods and services produced by Tropical
Republic in 2009. Expenditure on Tropical Republic on bananas is 900 bunches of bananas at $4 a
bunch, which is $3,600. Expenditure on coconuts is 500 bunches at $5 a bunch, which is $2,500.
Total expenditure is $6,100, so nominal GDP in 2009 is $6,100.

b. Calculate real GDP in 2008 and 2009 using 2008 as the base year.

Real GDP in 2008, the base year, is the same as the nominal GDP = $5600.

Real GDP in 2009 using base-year (2008) prices is $6,800. The base-year prices method calculates
the market value of the 2009 quantities at the base-year prices of 2008. To value the 2009 output at
2008 prices, real expenditure on Tropical Republic on bananas is 900 bunches at $2 a bunch, which
is $1,800, and real expenditure on coconuts is 500 bunches at $10 a bunch, which is $5,000. Adding
these two expenditures shows that real GDP in 2009 using the base-year prices method is $6,800.

c. Calculate the nominal GDP growth between 2008 and 2009.

Nominal GDP growth between 2008-2009 = (6100-5600)/5600 * 100% = 8.93%

d. Calculate the real GDP growth rate between 2008 and 2009 using 2008 as the base year. Compare that
with the nominal GDP growth rate you found in c. Why is there a difference?

Real GDP growth between 2008-2009 = (6800-5600)/5600 * 100% = 21.43%

The real GDP growth rate looks at the change in quantity only as we hold the price level fixed at the
base year, but the nominal GDP growth rate is affected by both quantity change and price level
change.