Macroeconomics

Practice Problems
Data in Macro

1. The tiny nation of Balencia has huge reserves of diamond. In 2010, Balencia spent $100
billion on private consumption, $50 billion on investment and $70 on government pur-
chases. During the same year, Balencia imported goods and services worth $40 billion
and only exported diamonds worth $80 billion. Foreign workers working in Balencian
diamond mines earned a total of $2 billion. Balencia also paid $8 billion as rent on the
foreign capital that has been invested in its diamond industry. Balencia did not earn any
income from abroad. Being a developing country, Balencia also received foreign aid
worth $10 billion from the World Bank.

(a) Compute Balencia’s GDP, GNI and GNDI.

(b) Also compute Balencia’s CA.

(c) Is Balencia a net lender? If yes, how much is Balencia lending to other countries?

2. Foodland produces four products – bread, milk, sugar and salt. Treat the year 2000 as the
base year. The following table records the output and price of these four products in the
years 2000 and 2010:

Bread Milk Sugar Salt

quantity 10 20 5 5
2000
price 5 2 1 1
quantity 5 20 7 4
2010
price 7 3 2 1

(a) Compute the growth in Foodland’s nominal GDP between the years 2000 and 2010.

(b) Compute the growth in Foodland’s real GDP between the years 2000 and 2010.

(c) Assuming a constant population, do you think the well-being of Foodland’s citizens
improved between 2000 and 2010? Discuss.

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3. The consumption bundle of a typical consumer in a country consists of N goods. Let pi
and qi denote respectively the price and quantity of good i today, while p0i is the price of
good i in some base period.
(a) Show that the current CPI of the country can be written as

CP I = ΣN
i=1 ωi p̂i × 100,

where ωi is the share of good i in total consumption expenditure using the base year
prices, i.e., ωi = p0i qi /ΣN 0 0
i=1 pi qi , and p̂i = pi /pi .

(b) Suppose prices change in a way such that for goods i = 1, ....., n

pi = (1 + α)p0i ,

while for goods i = n + 1, ....., N

pi = (1 − β)p0i ,

where 0 < α < 1 and 0 < β < 1. Let Σni=1 ωi be denoted by ω̄. Then show that
CP I > 100 if
β
ω̄ > .
α+β