ANSWERS TO TEXTBOOK PROBLEMS
Review Questions
Both total output and output per worker have risen strongly over time in Canada.
Output itself has grown by a factor of 80 in the last 125 years. Output per worker is now five times as great as it was in 1921. These changes have led to a much higher standard of living today.
The business cycle refers to the short-run movements (expansions and recessions) of economic activity. The unemployment rate rises in recessions and declines in expansions. The unemployment rate never reaches zero, even at the peak of an expansion.
A period of inflation is one in which prices (on average) are rising over time.
Deflation occurs when average prices are falling over time.
Aggregation refers to the process of adding together individual economic variables to obtain economy-wide totals. Aggregation distinguishes microeconomics from macroeconomics. It allows us to study the economy as a whole, rather than looking at its individual parts.
Macroeconomists engage in macroeconomic forecasting, macroeconomic analysis, basic research, and data development. Macroeconomic research can be useful in investigating forecasting models to improve forecasts, in providing more information on how the economy works to help macroeconomic analysts, and in telling data developers what types of data should be collected. Research provides the basis (results and ideas) for forecasting, analysis, and data development.
The steps in developing and testing an economic model or theory are: (1) State the research question; (2) make provisional assumptions that describe the economic setting and the behaviour of the economic actors; (3) work out the implications of the theory; (4) conduct an empirical analysis to compare the implications of the theory with the data; (5) if the theory fits the data well, use the theory to predict what would happen if the economic setting or economic policies change; (6) if the theory fits the data poorly, start from scratch with a new model; (7) if the theory fits the data moderately well, either make do with a partly successful theory or complicate the model with additional assumptions. The criteria for a useful theory or model are that (1) it has reasonable and realistic assumptions; (2) it is understandable and manageable enough for studying real problems; (3) its implications can be tested empirically using real-world data; and (4) its implications are consistent with the data.
Yes, it is possible for economists to agree about the effects of a policy (that is, to agree on the positive analysis of the policy), but to disagree about the policy’s desirability (normative analysis). For example, suppose economists agreed that reducing inflation to zero within the next year would cause a recession (positive analysis). Some economists might argue that inflation should be reduced, because they prefer low inflation even at the cost of higher unemployment. Others would argue that inflation isn’t as harmful to people as unemployment is, and would oppose such a policy. This is normative analysis, as it involves a value judgment about what policy should be.
Classicals see wage and price adjustment occurring rapidly, while Keynesians think that wages and prices adjust only slowly to shocks. The classical theory implies that unemployment will not persist, since wages and prices adjust to bring the economy rapidly back to its full-employment equilibrium in response to a shock. But if Keynesian theory is correct, then the slow response of wages and prices means that unemployment may persist for long periods of time unless the government intervenes.
Numerical Problems
a. Average labour productivity is output divided by employment:
2011: 12 000 tonnes of potatoes per 1000 workers = 12 tonnes of potatoes per worker
2012: 14 300 tonnes of potatoes per 1100 workers = 13 tonnes of potatoes per worker
The growth rate of average labour productivity is [(13/12) – 1] × 100% = 8.33%.
The unemployment rate is: 2011: 100/1100 = 9.1%
2012: 50/1150 = 4.3%
The inflation rate is [(2.5/2) – 1] × 100% = 25%.
The answers to this problem will vary depending on the current date. Numbers are at annual rates in billions of current dollars.
2015
2016
GDP
1,986.2
2,027.5
Exports
627.2
628.7
Imports
674.7
676.7
Federal Net Financial Debt
586.8 (2014)
573.2 (2015)
a.
Exports/GDP
31.6%