Assignment 1 and 2

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Assignment 1
1.-Suppose that instead of cooking your own dinner, you decide to work one extra hour, earn 12 euros and then purchase your dinner for 10 euros.
A.-Nominal GDP will grow in 22. This is because the extra hour in work and the purchase of the dinner are both taken in count by the GDP. We are not able to calculate the real GDP because we don’t know in how much the prices have change during time.
B.-Real GDP will normally grow less than Nominal GDP in an economy that is growing. This is because it eliminates the price effects and only measures the production.  
2.  Consider an economy that only produces three goods: cars, computers and oranges. Production for 2016 and 2017 is given in the table below:
a.-Compute the nominal GDP and the nominal GDP growth rate in 2016 and 2017
Nominal GDP2016 = 10*2000 + 1000*1 + 4*1 = 21 004
Nominal GDP2017 = 12*3000 + 6*500 + 1000*1 = 40 000
Nominal GDP Growth Rate = (40 000 - 21 004)/ 21 004 = 0.9044= 90,44
b.-Using 2016 as a base year, compute the real GDP and the real GDP growth rate
Real GDP2017 = 12*2000 + 6*1 + 1000*1 = 25 006
Real GDP Growth Rate = (25 006 - 21 004) / 21 004 = 0.1905 =19,05%
c.-Same question, using 2017 as a base year
Real GDP2016 = 10*3000 + 1000*500 + 4*1 = 530 004
Real GDP Growth Rate = (40 000 - 530 004) / 530 004 = - 0.9245= 92,45%
d.- Discuss whether the following statement is right or wrong: “the computed growth rate of real GDP depends on the chosen base year”
If the prices and quantities produced in the different years differ a lot the computed growth rates of the different base years will also not be the same, so it’s true. 
3. Assume that the Japanese consumer price index is 108 while the US price index is 104. Does this mean that inflation is higher in Japan than in the US?  
This case will only apply if the basket and the year where it was measured will be the same one in both countries.
4. You read in the newspaper that ‘The US trade deficit has increased by 2% during the past year. Investors expect an increase in corporate and public debt’. Explain this statement using the appropriate equations 
Using the “twin deficit hypothesis” we have the following equations:
C+S+T=C+I+G+CA
(S-I)+(T-G)=CA
As we know, S-I represent Private Debt  and T-G represents Trade Deficit. 
Using the equation: (S-I)+(T-G)=CA), we can appreciate that when the trade deficit increases it will produce a public debt and/or a private debt. 
5. Consider the following (fictitious) accounting figures of the following two Eurozone 
economies (data is expressed in % of GDP). Note that under the 1992 Maastricht 
Treaty, public deficit should not exceed 3% in Member State economies.
e.- What modification of the Greek macroeconomic equilibrium would be needed to bring back public deficit under 3%?
The data is expressed as a percentage of GDP; thus, the current public deficit is 4%. In order to lower the public deficit to 3%, the Greek Government would either have to increase Taxes by one percentage point, relative to Government Spending or decrease Government Spending one percentage point relative to Taxes.
f.- Explain the relationship between the German trade balance and the Greek public balance. What modifications of the German accounting equilibrium would help reduce the Greek deficit?
The Greek trade balance is comprised of private savings and public balance. Thus, if Germany has a trade surplus, then Greece has a trade deficit and that would mean that Greece has private and/or public debt. Germany could lower it’s trade surplus (and reduce the Greek deficit) by either reducing private savings (relatively less savings and more investment) or public balance (relatively less taxes and more government spending.).
Assignment 2
1. Even in the absence of a collective negotiation framework, workers have a negotiating power which allows them to receive a wage superior to their reservation wage. Discuss the determinants of workers’ negotiating power by answering the following questions:
 a. Consider a pizza delivery man and a network administrator. Which of the two workers has more negotiating power? Why?
The Network administrator will have more power of negotiation because his abilities are more difficult to learn and the job will require more expertise on doing it. For that same reason it is more difficult to match with a worker with his abilities than the one that is capable to deliver pizza, giving him more negotiation power.
 b. For a given job, analyze to what extent existing labor market dynamics impact the workers negotiating power? What labour market variable can be used to appreciate the workers’ negotiating power at a given point in time?
There are basically two dynamics that will impact in the worker negotiation power. The fist one is how hard it would be to find another job and the other is how easy the worker can be replaced.
For these two factors, we have the market variable of unemployment, that will help us analyze how hard will be to find another job, and in the other hand we have the minimum wages and the average wages of the competition salaries, that will tell us the value of another person that is capable to do the same job.
2. Discuss whether the following assertion is right, wrong or uncertain: ‘the equilibrium unemployment rate is not affected by economic policy decisions’
The equilibrium unemployment rate will depend on the relative position of the real wage determined by the worker negotiation power and the real wage determined by the determination of prices, so its wrong. Prices can be manage by different economic policy decisions, for example, the reduction of taxes will boost the aggregate demand, affecting prices and by concurrency and the equilibrium unemployment.
4. Assuming that the corporate mark-up rate is 5% and that wages are determined according to the following equation: W = P (1 – u), where P is the price level and u is the unemployment rate. 
a. What is the real wage, using the PS relationship?
W/P= 1/(1+u)
W/P= 1/(1+0.05)
W/P= 1/1.05
W/P=0.952
Real wage is 0.952
b. What is the level of the equilibrium unemployment rate? 
W=P(1-u)
W/P=1-u
0.952=1-u
u=0.045
The level of equilibrium unemployment rate is 4.8%
c. Assume that the corporate markup reaches 10%. How should this impact the equilibrium unemployment level? Why? 
As we learn in class, when employers increase their mark-ups(u), final prices increase, implying lower real wages.