# Econ 204 Assignment 1

1952 Words8 Pages
Econ 204 – Assignment 1 Question 1 (30 marks) In class, we saw how real GDP has grown over time in Canada. We also learned about the expenditure components of GDP, and this question will have you look at i) how the expenditure components have changed over time, and ii) how the expenditure components as a share of real GDP have changed. We’ll obtain data from CANSIM II: http://dc.chass.utoronto.ca/cansimts/English/ (Note: this link only works if you’re on campus or using UVic’s VPN.) Click on Vital economic and social statistics about Canada > National accounts > GDP by expenditure (chained 2002 dollars). To keep things simple, we’ll use these series for the four main components of real GDP (V1992067): Personal expenditure (V1992044),…show more content…
Let (R/P)1 equal the initial value of the real rental price of capital, and (R/P)2 equal the final real rental price of capital after the labour force increases by 10 percent. The rental price increases by The real rental price also increases by 6.9 percent. Let (W/P)1 equal the initial value of the real wage, and (W/P)2 equal the final real wage after the labour force increases by 10 percent. The real wage increases by The real wage decreases by 2.8 percent. c) Using the same logic as (b) So, output increases by about 3 percent. The change in the real rental price of capital is: The real rental price falls by 6.5% because there are diminishing returns to capital. The change in the real wage is: So, the real wage increases by 2.9% because the added capital increases the marginal productivity of the existing workers. (Notice that the wage and output have both increased by the same amount, leaving the labour share unchanged—a feature of the Cobb-Douglas production function.) d) Using the same…show more content…
The real wage and rental price of capital also increase by 10 percent. Question 4 (15 marks) a) Public saving equals T-G. An increase in government spending, G, reduces public saving. b) Private saving equals Y-T-C. An increase in government spending does not affect private saving. c) National saving equals Y-C-G. An increase in government spending reduces national saving by an amount equal to the increase in government spending. d) The equilibrium interest rate increases to bring desired investment into equilibrium with the reduced quantity of national saving. e) The equilibrium quantity of investment is reduced via the increase in the interest rate by an amount equal to the increase in government spending. Question 5 (15 marks) a) capital is added. No, MPK does not diminish because it does not decline as more is also acceptable. b) L = 100: L = 110: L = 120: 0. . . Yes, MPL diminishes because it declines as more labour is added. 14 11.2