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
II.3. 10 pts. Write down the production function with a ‘residual’ and explain its
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.
III.3.2. 15 pts. You are a top manager in a gigantic company.