# Economics 2

Total 150 points

Question I. 40 pts. Testing your understanding of Nominal and Real GDP

I.1. 20 pts. Based on the information in Table 1, compute a deflator of GDP, 1972-2019, and explain the nature and functions of this deflator.

Table 1. The US GDP in current and ‘constant’ prices.

Years  GDP at current market prices, billions \$\$.    GDP at ‘constant’ prices, billions \$\$.   Deflator of GDP

1972                             1,279                                                                  5,383

1982                             3,343                                                                  6,805

1992                             6,520                                                                  9,685

2002                            10,936                                                                13,493

2012                            16,197                                                                16,197

2019                            21,433                                                                19,092

I.2. 20 pts. Based on the information in Table 1, draw a graph of the dynamics of Nominal and Real GDP, 1972-2019, and explain it

Question II. 50 pts. Explain the logic of separation of GDP into three parts: increase in output due to higher efficiency; increase in output due to expanded fixed capital; and increase in output due to expanding labor inputs.

II.1. 10 pts. Introduce notation, write down the production function (see class notes), and explain its logic.

II.2. 10 pts. Write down the production function without a ‘residual’ and explain

its logic.

II.3. 10 pts. Write down the production function with a ‘residual’ and explain its

logic.

II.4. 20 pts. Suppose that you computed contributions of higher efficiency,

expanded fixed capital, and expanded labor inputs into growth of GDP.

What is a typical range of these contributions for top industrialized national

economies and for least developed national economies? Explain your

Question III. 60 pts. Explain the concept of returns to scale and its practical applications.

III.1. 15 pts. Define increasing, constant, and decreasing returns to scale.

III.2. 15 pts. Graph increasing, constant, and decreasing returns to scale. Explain

III.3. 30 pts Suppose that you are a top manager. Explain practical applications of

the concept of returns to scale.

III.3.1. 15 pts. You are a top manager in a small company.