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