**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

**YOUR ANSWER**

**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__.

**YOUR ANSWER**

**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.

**YOUR ANSWER**

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

its logic.

**YOUR ANSWER**

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

logic.

**YOUR ANSWER**

**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

answer.

**YOUR ANSWER**

**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.

**YOUR ANSWER**

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

your graph.

**YOUR ANSWER**

** 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.

**YOUR ANSWER**

** III.3.2. 15 pts.** You are a top manager in a gigantic company.

**YOUR ANSWER**