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Universitat Pompeu Fabra Introduction to Macroeconomics 2020-21Instructor:
Problem set 1 (All necessary readings can be found in Aula Global)
1. Professor Sir Charles Bean discusses the measuring of economic activity in reading 1
and in the related video, https://voxeu.org/article/rethinking-measurement-economic-activity
1.1 Consider graph A, where technology is evolving but GDP appears to be falling. How
could you rationalize such a phenomenon?
1.2 Comment graph B, explain why measured GDP growth is likely to underestimate
the actual economic growth in UK over the years 2007-2015.
A B
GDP
Years
2. The following statements are false. Explain why.
a/ Deflation means a decrease in the inflation rate
False, deflation means the reduction of the general level of prices in an economy.
Inflation rate tells how quickly prices rose during a period.
b/ In an economy you cannot simultaneously observe an increase in the price level and a
decrease in the inflation rate (both calculated using the CPI – Consumer Price Index).
Propose a numerical example to illustrate your answer.
CPI tells us what happens with the prices of some goods and services. CPI don’t take into
account all the g&s. That’s why you can observe an increase in the price level and a decrease in
the inflation rate.
c/ If nominal economic growth in a mature and developed economy is 10% we can affirm
these are good news since it implies a generous increase in production and its expected net
creation of jobs. Give an example (in very basic economy producing one good) showing why
this may be wrong.
d/ A HCPI Inflation higher than inflation measured by the GDP deflator could be explained by
a decrease in the price of imported consumption goods.
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