Exercise Book PDF

General Economics:
Exercise Book
by Egor Sidorov
Ústí nad Labem, 2008

Preface
This exercise book is designed for students enrolled in non-economic study programs studying
General Economics course. The significant share of macroeconomic problems in this book is
based on statistics from developing and transformation economies. This fact makes it different
from the literature alike. The microeconomic part of issues refers to world-known brands,
companies and forms of business in order to involve the students‘ experience in solving the
problems.
The work on this exercise book was financed by the grant of the Higher Educational Institutions
Development Fund. The support is greatly acknowledged.
Please note:
This Book uses to some extent an informal style of number abbreviations:
— €50B – correspond to 50 billion euro;
— $24M – corresponds to 24 million dollars.
Exercises marked with ―*‖ sign are more complicated than the rest.
Exercises marked with are more time consuming than the rest.
© Egor Sidorov — Ústí nad Labem, 2008
ISBN 978-80-7414-057-0
2
Book review
This exercise book is developed for those students who study general economics course while
being enrolled in non-economic study programs and schools. The book consists of 10 chapters
summing up the basic spheres of economic theory. In principle the book covers the whole range
of problems discussed in the general economics course.
Each chapters of the book is divided into two parts. The first part of the chapter contains
discussion points on chosen problems. These questions have such style and structure that in many
cases they lead reader to discover certain economic phenomena by himself. The second part of
the chapter contains specific problems to solve both by using calculations or logical reasoning.
The approach used in the book combines theoretical knowledge with personal assumptions and
reasoning of the student. This captivating approach leads to closer understanding of far more
complicated real world issues and motivates finding possible solutions. The exercises are often
accompanied with the real-world data presented in such way that the student has enough space to
not only understand it but also give a correct interpretation.
In number of cases the problems and issues discussed in the book do not have a single and the
only possible solution. In this respect the close interaction between the teacher and student is
necessary: the student needs to get feedback if his approach and logics is right or misleading. The
aim of the book, however, is not only to find the right answer to questions and problems, but also
to bring the student to understanding, that one issue may be viewed at from different viewpoints.
This approach provides a complex view on economic reality.
The book is primarily focused at economic phenomena of developing and transforming

economies. However, in many cases parallels with developed economies are being provided. This
gives the students possibility to understand the distinctions and similarities between the economic
systems.
One can conclude that all above mentioned facts make the book a good study material.
Ing. Jakub Vosatka, Ph.D.

November 6, 2008
Usti nad Labem
3
Contents
1 Introduction .................................................................................................................................................... 5
2 Supply and Demand ..................................................................................................................................... 9
3 Production and Cost Analysis................................................................................................................. 15
4 Theory of a Firm .......................................................................................................................................... 20
5 Introduction to Macroeconomics. Measuring output ................................................................... 25
6 Inflation........................................................................................................................................................... 30
7 Unemployment ............................................................................................................................................ 35
8 Monetary Policy ........................................................................................................................................... 40
9 Fiscal Policy ................................................................................................................................................... 43
10 International Trade and Economic Relations .................................................................................. 48
4
1 Introduction
scarcity of resources | production possibility frontier | opportunity costs | economic models and their peculiarities
Points for discussion
a) How can you define an economic model? How does the model differ from reality? Think
about the main issues that economic modeling faces.
b) Explain what is ceteris paribus (others things remaining unchanged) assumption? Why is it so
important for economic modeling?
c) Given pairs of the following economic variables: income and consumption, price and number
of goods bought, wages and number of working hours. Think about which of these variables have
direct relationship. Which of them have indirect (inverse) relationship?
d) Try to name general categories of resources that are necessary for production of such good as
Ferrari and of such a service as hairdressing. How do economists call these groups of resources?
e) One can sometimes hear the statement that time is a scarce resource. Which of the economic
production factors already include time?
f)How do you understand the term ―scarcity‖? Name the resources that you regard to be scarce.
Name the goods which are free. What if scarcity did not exist?
g) Does scarcity mean poverty? Need a wealthy nation like the United States be concerned about
scarcity? Why? What do all economic systems commonly face?
h) What is the relation between the scarcity, choices, efficiency and economic rationalism?
i)What do economists call ―opportunity costs‖? What is the way to estimate your opportunity
costs of investing into your own business if the next best option is putting money into bank?
Exercises
1.1) Whichfactors would you include into the model determining the price of apartments in your
town? Which of them it is sensible to include in ceteris paribus assumption?
5
1.2)Curves on the following graphs show relations between the temperature outside (t°) and
quantity of particular goods (Q) sold in the supermarket. Think of examples of such goods for
every graph. Which graph best suits for computers?
Q Q Q
t° t° t°
1.3)Say you have $20 in your pocket and you plan to spend the whole sum to buy music CD‘s.
Draw a graph showing how much CD‘s would you buy in case their price is $2, $5, or $10 a
piece.
1.4) The following graphs show relations between the price of goods (P) and their quantity (Q)
sold in the market. What is the difference between these two goods? Think of examples of such
goods.
P P P
Q Q Q
1.5) Each of the following graphs shows relations between the time (t) and quantities of particular
shoes (Q) sold in the shoe-shop. Which of the goods is more fashionable? Why?
Q Q
t t
6
1.6) The following graph shows relation between income (I) and savings (S) of a particular
family. Explain the ascending slope of the curve. What does the part of the curve under the x-axis
show? What does the intersection point of the curve and x-axis mean?
S
1.7)Draw a graph showing relation between the level of employment and number of sport-car
purchases.
1.8) Economists tend to measure choices or decisions people make in terms of opportunity costs,
i.e. of what was foregone, or the next best alternative given up, if resources were used in one way
rather than another. Try to define and evaluate in money terms opportunity costs of spending
1 hour in the class of General economics for you; for your parents; for society.
1.9) Say a janitor and a tax consultant from the same firm need to get from Prague to Berlin to
spend a weekend. The plain to Berlin costs $100 and the flight time is 1 hour. The train ticket
costs $15 but it takes 6 hours to go. The wage of a janitor is $1/hour; the financial consultant
charges $20 an hour for his services. What type of transport will you choose if you were a
janitor? What if you were a tax consultant? How high the opportunity cost will be for a tax
consultant in case he goes by train? (Assume these gentlemen value their free time at their hourly
wage rate).
1.10) Say you run a McDonald‘s restaurant and you spend 50 hours a week to manage it. By
operating a restaurant you forgo the next best alternative of working as a car seller and getting
$20 an hour. Say you are making $500 of profit a week. Does it make sense to continue running
your own business? Explain your answer.
1.11) The average Spanish spends his time doing the following activities daily as presented in the
following table. Think of what type of activities could an average Spanish give up in order to
make more money working. Now calculate the opportunity cost of lifestyle depicted in the table,
if a minimum monthly wage is €700.
Activity % of a daytime
TV and video 8
Free time 17
Eating 7
Sleep 36
Household work 15
Work 17
Source: http://epp.eurostat.ec.europa.eu
7
1.12) Say the economy of the small village is capable of producing the two types of goods:
cookies (consumer goods) and ovens (investment goods). Due to scarcity of the available
resources (labour, capital and land) the more ovens are being produced the fewer cookies are
being baked. The following table depicts the village‘s production possibilities.
Option Cookies (boxes) Ovens (units)
A 0 5
B 6 4
C 11 3
D 15 2
E 18 1
F 20 0
a) Draw a production possibility frontier (PPF). b) Which of the goods refers to present and
which one to future consumption? c) Explain what happens in the economy while moving from
point to point on the graph? d) Show the how the marginal rate of transformation changes along
the curve. Try to explain this phenomenon. e) Draw two additional points G (15; 4) and H (6; 6).
Show points that are efficient, inefficient and unattainable given that PPF shows the optimal use
of available resources? f) In which case the economy is in F state? g) What should happen before
the economy is able to reach the state depicted by ―G‖? h) What are the opportunity costs of
moving from point D to point C? What does this relocation actually mean? i) Say the village has
built a new power plant that allows producing 50 percent as more cookies and ovens as it does
now. Draw a new PPF. j) Draw a new PPF for the case when the technology of oven production
improves, so that the quantity of ovens doubles for any given quantity of bread and the bread
production doesn‘t experience any changes. k) Does all this necessarily mean that our village will
reach the possible production level in reality?
1.13)Your younger brother receives weekly $10 of pocket money, which he spends entirely on
sandwiches at school and his football cards collection. Football cards cost $2 a piece and
sandwiches cost $1. Draw your brother‘s budget line with axes showing the quantities of football
cards and sandwiches he can buy. a) What is an opportunity cost of buying a football card?
b) Show how the budget line will shift if the weekly allowance changes up to $24, if it decreases
down to $12. c) Show the budget change if the price of a football card reduces down to $1.
d) What is the budget line equation?
1.14)
Are there any common problems that are being solved as in centrally planned as well as in
market economies? Explain your point of view.
1.15)Distinct between economic and non-economic goods: a) air we breathe; b) street ice in
winter; c) artificial ice used for packaging; d) oil used for rubber production; e) sand on the wild
beach; f) sand used in glass production. Explain your point of view.
8
2 Supply and Demand
supply and demand curves | demand factors | supply factors | price elasticity | market equilibrium

a) What is utility? What is marginal utility? Can marginal utility be negative? If ―No‖, why? If
yes, think of your own examples of such situations. What is an indifference curve? Can two
indifference curves cross? Explain why. What is marginal rate of substitution (MRSxy)? In which
case will MRSxy be a constant?
b) What is the difference between demand, demand function, and demand curve? When the
economists say ―change in demand‖ and ―change in quantity demanded‖ do they mean the same
things?
c) What does the law of demand state? What about the law of supply?
d) Explainwhy does the demand curve have a downward slope? Why does the supply curve have
an upward slope?
e)
Why do economists need ceteris paribus assumption when constructing the demand curve?
What is being held constant when a demand curve for iPhones is being constructed?
f)Name as much as possible non-price factors influencing the demand for Volkswagen
minivans?
g) What are main non-price factors influencing the supply of Budweiser beer?
h) Whatis price elasticity? How can one calculate it? In which units one can measure elasticity?
Why can elasticity coefficient be either positive or negative?
a)Knowing what price elasticity of demand is, try to explain what is income elasticity of
demand?
i) Whatis market? Name the main market players? What is the main aim of the household on the
market? What is the main aim of the firm on the market?
j)What is market equilibrium? Which forces lead to market equilibrium? Try to explain this
mechanism using such terms as excessive stock (surplus) and deficit (shortage).
9
Exercises
2.1) Say the cost of public transportation in you city is regulated by municipality. The maximum
price of the ticket for all private transporters is fixed at $1 per 30 minutes long trip (this is a so-
called price ceiling). Look at the following graph and describe the current situation on the market.
What will happen if municipality releases the ticket price?
P
3
1 2 3 4 5 6 Q (thous.)
2.2) The prices on the shoe market fluctuate around the equilibrium price. What economic sense
do segments AB and CD have? What happens in the market after P1 and P2 prices are being
established?
P
D S
A B
P1
P2
C D
2.3) Explainusing a supply-demand graph why during the summer season vegetables sold in the
supermarket are cheaper compared to winter time?
2.4) Imagine you visit a pub where only two types of beer are served — Budweiser and Heineken
at a price of $2 for a bottle. Your demand is elastic since you are indifferent what beer to drink.
You are planning to spend $10 for a beer today. You get known that the price of Heineken is
reduced by $1 for today. Discuss the substitution and income effects connected with this price
change.
2.5) Try to name at least 3 goods or services complementary to mobile phones, DVD players, and
library services. Think of substitutes to them.
2.6) What will happen to the demand for paper books if publishing houses begin to sell electronic
books to the libraries? Use the supply-demand model.
10
2.7)What happens to the demand for Lamborghini if the price of their tires goes down by
40 percent? What happens to demand for Lamborghini tires if the price for Lamborghini goes
down by 40 percent?
2.8)Draw the curves of perfectly elastic and perfectly inelastic demand. Think of examples of
goods with perfectly inelastic demand.
2.9) Which of the presented graphs depicts the supply of yoghurts in Kaufland store: a) during
the day? b) during the week? c) during the year? Explain your point of view. When the supply
curve is most elastic by price and why?
P P P
Q Q Q
2.10) Curves D and S0 depict the initial demand and supply on the local market of cheese. Name
the possible reasons for moving from E0 to E1?
P
D
S1
S0
E1
E0
2.11) Curves S and D0 depict the initial situation the market of CD-players. Try to name the
possible reasons for moving from E0 to E1?
P
S
E0
E1
D0
D1
11
2.12) Due to attractive leasing offer the demand for Ford Focus is exceeding supply, so the
customers have to wait up to half a year to get their car from a plant. Try do depict this market
situation on a graph assuming that the price of Ford Focus remains at the initial level.
2.13)In 2006 over 8.3 million people visited Musée du Louvre in Paris. This is close to its total
capacity. Draw a curve depicting supply of tickets at this museum.
2.14) The graph shows the situation on the market of car tuning services. What happens on the
market if: a) price of car components goes up? b) automotive plants start producing cars with
aggressive sporty design? c) car tuning stops being fashionable? d) more people start preferring
bicycles to cars? e) the car tuning services advertising campaign turns out to be very successful?
P
D S
2.15) The marketing research agency provided the following data on DVD rentals in Usti nad
Labem. a) Graph market of DVD rentals in Usti nad Labem, plotting at least 8 points on the
graph. b) Determine the equilibrium price and quantity of DVD‘s. c) What quantity of DVD‘s is
supplied and what quantity is demanded at the price of $5? Analyze what happens if this situation
occurs the on market. d) What situation occurs if the price of DVD increases up to $7?
Price, $ Quantity demanded Quantity supplied
2 1000 200
4 800 600
6 700 700
8 300 900
2.16) * The following table presents a situation on the market of CD-players in a small village.
a) Determine the coefficients of the demand function of y=ax+b type? b) Draw a demand curve.
c) The current price for a CD-player is $40. The firm is planning to decrease the price of from
$40 to $35. Calculate the price elasticity of demand on this part of a curve. d) What happens to
the total sales in this case? e) Draw a supply curve described by the following equation:
P=15+0.5Q. f) Finally, find coordinates of the market equilibrium point.
Price Quantity demanded
40 20
30 40
20 60
12
2.17)Which of provided graphs depicts a normal good? a necessity good? an inferior good?
Think of examples of such goods.
Q Q Q
I I I
2.18) Sony Vaio notebooks are quite comparable to other brands on the market according to
technical parameters. Say when their price has risen by 30 percent the quantity demanded has
also increased significantly. How can you explain this paradox? What type of goods do Sony
Vaio notebooks belong to?
2.19) Thinkof examples of goods for which the demand curve is likely to be inelastic. In case of
what goods will the demand curve tend to be elastic? Do the same exercise concerning supply.
2.20) Try to explain how the elasticity of demand is influenced by each of the following factors:
a) necessity of good or service? b) number of substitutes? c) addictiveness? d) time period? e)
and consumer awareness? Give your own examples of such situations.
2.21) Think about how the price elasticity of supply is influenced by the following factors:
a) time horizon? b) availability of stocks? c) resource mobility? Think of your own examples.
2.22) Which of presented demand curves D1 or D2 is more elastic? Explain your point of view.
P($)
D1
3
q
2
D2
1
q
1 2 3 4 5 6 Q (pieces)
2.23) Say you are running a music shop. Will you need information about the demand price
elasticity of your merchandise? What for? What information will you need to calculate elasticity
coefficients? How will you collect it?
2.24) What is the price elasticity of demand a) for salt? b) for Tesco sale catalogue merchandise?
c) for Santa Claus costumes before Christmas? d) for hairdressing services? e) for drugs?
13
2.25) Suppose you run a shoe-shop and you need to determine the new price policy of your firm.
How data on demand and price elasticity will affect your decision?
2.26) Say you are a manager in a coffee shop. You know that the demand for cheesecakes has
price elasticity coefficient equal to 0.4. What will be the change in quantity demanded after you
reduce the price for cheesecakes by 20 percent? Is this a rational marketing policy?
2.27) The Tesco store has announced a 50-percent off sale for all white t-shirts this week. During
the week the sales of t-shirts increased by 100 percent. Determine the price elasticity coefficient
of demand. What type of demand is that?
2.28) Mr. Jenkins from the USA thinks that Coca-Cola tastes much better than Pepsi. Mr. Novak
from the Czech Republic sees no difference between these two beverages. Whose demand for
Pepsi beverages is more price elastic and why?
2.29) Hewlett Packard decided to reduce the prices of their notebooks in order to see if it would
help to increase their total revenues. Say company reduced notebook prices by 25 percent on
average and their sales increased from $100 000 per month to $105 000. Comment on the price
elasticity of demand without making any precise calculations; calculate the elasticity coefficient
then.
2.29) Say as a grocery store-keeper you are selling 100 packs of salt and 100 packs of sugar
daily. By chance the price of salt and sugar is equal to $1 per pack. Suppose you want to increase
your sales. How would you change the prices of salt and sugar in order to get the maximum effect
if you have read that price elasticity of demand for salt equals to 0.5 and for sugar it is 2?
2.30) Adam Smith‘s paradox of value sounds like that: ―Although water is on the whole more
useful, than diamonds, diamonds command a higher price in the market‖. Try to explain this
classical dilemma.
14
3 Production and Cost Analysis
revenue | output | costs | inputs and outputs | profit | production optima

a) What factors of production do you know? What costs are connected with each of them?
b) Some authors single out additional entrepreneurship (and enterprise) production factor. What
is peculiar about it? What costs are connected with entrepreneurship production factor?
c)Define the fixed, variable and total costs. In what time horizon can we speak about fixed and
variable costs? Why? Think of examples of such costs in case of university.
d) How can one calculate average costs and marginal costs? Why do managers need information
about costs in general and average and marginal costs in particular? What determines the shape of
average total costs curve in a short run?
e) What is revenue? What information will you need to calculate revenue? Define what is
average and marginal revenue?
f) Speak about the law of diminishing returns. Think of your own situation in production or
services when every other unit of input brings less effect than the previous one.
g) What is profit? What is peculiar about economic profit? Why do you think practical
accountants are usually reluctant to deal with implicit opportunity costs and economic profit
categories?
h) What do economists call a normal profit? Why do economists (however, not accountants)
regard normal profit to be part of costs?
i) What is the difference between technical and economic efficiency?
Exercises
3.1) The economies of scale may occur along with the expansion and growth of an enterprise. Try
to explain why can this phenomenon occur? Give the concrete examples of technical, managerial,
marketing and financial economies of scale. However the growing firm may also face different
issues. Think of possible diseconomies of scale.
15
3.2) The following table presents data on cost of advertising (in €) in most viewed commercial
television channels in different countries of Europe in 2001. Explain where the economies of
scale occur and what are the reasons for it? Why is advertising an important activity on an
imperfect competitive market? What ―imperfections‖ does it help to overcome? What effect
advertising has? Show it on the supply-demand model.
Cost of a 30 second Average number of Cost of reaching
Country Channel
prime time advert spectators 1 000 inhabitants
Germany RTL 45 507 11 376 750 4
Spain TVE1 16 954 3 390 800 5
Netherlands RTL 4 10 775 920 940 11,7
Austria ORF 10 400 522 613 19,9
3.3) Suppose you are a management analyst for a McDonald‘s fast-food chain. Make a list of the
inputs and outputs of your firm assuming you produce only Big Macs. Refer each input to some
production factor category (labor, capital or land).
3.4) The graph presents results of a farmers‘ work. As you can see after the farmer adds the first
tonne of fertilizer the crop increases by 50 percent, the next tonne brings 100 percent increase.
However, the following melioration activities aren‘t so efficient and furthermore can do harm
reflecting in the decrease of crops. Look at the graph of total output (TP) depending on amount of
fertilizer (Q) and prepare your own graph depicting the marginal output (MP) depending on
amount of fertilizer. Explain the positive, zero and negative values of marginal output. What
economic law is reflected on these graphs?
TP(t) MP(t)
3 2
2 1
1 0
-1
1 2 3 4 5 6 Q (t of fertilizer) 1 2 3 4 5 6 Q (t of fertilizer)
3.5) Suppose you run a pizza restaurant. Try to determine which of the following costs are likely
to be variable or fixed this year: a) monthly rental payments for the building; b) wages of the
cook; c) salary of an accountant; d) central heating; e) flour; f) insurance; g) electricity; h) wages
of waiters; i) advertising expenditures; j) property tax.
3.6) What examples of fixed and variable costs can you find: a) in a beauty shop?
b) at the university? c) in a bar?
3.7) Would a firm still have any costs if it didn‘t produce any goods this month?
16
3.8) Explain why do average variable costs and marginal cost curves start in the same point?
P
MC AVC
3.9)Think about the reasons, why does supply curve of a perfectly competitive firm have an
upward slope?
3.10) The fixed costs of a firm are 5 money units. Based on information on variable costs in the
table calculate total, average fixed, average variable, average total and marginal costs.
Q FC VC TC AFC AVC AC MC
0 0
1 5
2 9
3 14
3.11)Using data from the table find average fixed costs corresponding to 4 units of output
(marked as X).
Q FC VC TC MC AFC AVC AC
0
1
2 80 30
3
4 X
3.12) Using available data fill in all the blank cells.

Q FC VC TC MC AFC AVC ATC
0
1 20
2 30 12
3 114
4 160
3.13) Say you are selling popcorn near the movie theater. Name all the fixed costs and average
costs you have. Say your fixed costs are $100 and average variable costs are $1 per bucket. Draw
the average fixed cost, average variable cost and average cost curves. It is obvious that selling
100 buckets of popcorn instead of 20 is more attractive. Now explain why, using economic
theory terminology.
17
3.14) Your firm is currently producing and selling 100 brushes for $2 each. It has average fixed
costs $0.5 and average variable costs $0.75 at this production level. a) Calculate the firm‘s total
revenue, total fixed cost, total variable cost, and total profit at this production level. b) Draw total
cost and revenue curves. c) What is the word for intersection point of revenue and total cost
curves? What is the economic sense of this point?
3.15) Say you have got a report from the economic analyst that currently your firms‘ marginal
cost is greater than the marginal revenue. Will you a) expand output, b) leave output as it is, c)
reduce output, or d) decrease price (assuming you are acting on the market close to perfect
competition)? Explain your answer.
3.16) The consulting firm has informed you that has your firm has the following average cost
function AC = 500 – 5Q + Q2 (―AC‖ is average cost and ―Q‖ is units of output). Derive the
equations for total cost and marginal cost. At what level of Q are total costs minimized?
Demonstrate with at least one calculation.
3.17) * Why may an organization‘s average cost of production rise as output rises in the short run,
but fall in the long run?
3.18) In case of which business will the long run be longer: the space shuttle production or the
ice-cream stand on the corner? Explain you answer.
3.19) Given quantities sold, price, and total costs in the table, determine the total revenue, profit,
marginal costs and marginal profit.
Q P TR TC Profit MC MProfit
0 30 120
20 30 240
40 30 480
60 30 960
80 30 1 920
100 30 3 840
3.20) The table shows the unit costs of producing jackets. a) Draw a graph characterizing the
total production costs. b) Say the market price for a jacket is $80 a piece. Draw a total revenue
curve. c) Locate the point of maximum profits.
Monthly number of
Cost per jacket, $
produced items, thous.
1 80
2 65
3 60
4 70
5 80
3.21) Your accountant has the following data: when your restaurant produced 40 pizzas the
average variable costs (AVC) were $0.5. When you produced 20 pizzas average fixed costs
(AFC) were $1. Define the average cost (AC) level when you produced 80 pizzas.
3.22) Mr. Jenkins insists that that the new wardrobe in the sleeping room didn‘t cost him
anything since he used his own boards from the garage and he worked by himself for
3 weekends. Is this statement true from the economic point of view? Explain why.
18
3.23) Explain the difference between the explicit cost of buying a bakery for $30 000 and the
opportunity cost. State any necessary assumptions by yourself. How may these costs influence
your decision to buy the bakery?
19
4 Theory of a Firm
types of proprietorship | types of competition | volume of market | market share | concept of added value
Discussion points
a) What are the main features of organization? Why organizations exist? What role do transaction
costs play here? Name the main goals of a firm.
b) Name basic types of proprietorships and their main peculiarities, advantages and
disadvantages. Explain the difference between limited and unlimited liability.
b) Which form of proprietorship is the most numerous? What are the reasons for that? What
forms of proprietorships employ the most people?
d) What types of competition can you name? Name the basic features, advantages and
disadvantages of each type and give real-life examples explicitly showing these features.
e) What is market in the economic sense? What is an ―invisible hand of market‖? Market
failures: in what cases competitive market mechanism is efficient good and in what cases it is
not?
f)What are the main reasons for monopoly existence? What is a natural monopoly? How can
monopolist perform price discrimination? Think of price discrimination examples from your own
experience.
g) Why is monopolistic competition ―monopolistic‖?
h)What is market power? In which situations and in which way can firms display it? How can
one measure it?
i) Name the general types of market failures that you know. Explain the reasons for them.
Exercises
4.1) What factors would you consider before choosing the type of proprietorship of your firm, if
you are planning to start: a) a bakery or b) automotive plant? What are the main sources of
finance available for a start-up business? What are the main advantages and disadvantages of
each source?
4.2) What type of proprietorship is likely to predominate in the following business spheres:
a) aircraft building? b) plumbing services? c) construction? d) advocacy? e) small retailing?
f) tourist operating? g) publishing? h) oil extraction? i) laundering? Explain your point of view.
20
4.3) Name several companies from your town that represent the following types of competition:
a) monopoly, b) oligopoly, c) monopolistic competition and, finally, d) those who are close to
perfect competition. Think about the main reasons for existence of monopoles. What
disadvantages connected with their existence can you name?
4.4) Why is perfect competition normally regarded as being ―better‖ than monopoly? Model a
situation when monopoly is more preferable. Explain you point of view.
4.5) Think about what types of market competition exist among the following businesses:
a) potato farmers? b) online book retailers? c) flight operators? d) beer brewers? e) local
stadiums?
4.6) Choose one of the businesses: a) a hotel, b) a pizza restaurant, c) a cinema, d) a CD retailer,
e) a taxi service. Describe the market conditions in which this business operates on your local
market. To what extent and in which way does the market of this business deviate from the
perfect competition?
4.7) What type of elasticity is peculiar for demand curve of the perfect competitive firm? Why
can consumers afford such type of behavior?
4.8)
Why so few examples of perfectly competitive markets exist? How do the contemporary
communication technologies influence the overall situation?
4.9) Would you choose Nokia over Sony-Ericsson or vice versa? What type of competition exists
at this market? How and why do these firms differentiate their products?
4.10) Draw the ATC, MC and MR curves for a perfect competitive firm in a short run. Show
under what conditions will this firm maximize its profit. Why the profit approaches to zero in the
long run on this type of market?
4.11) * Say your family is involved into potato farming business on a market close to perfect
competitive. After the General economics course you have calculated the following data
presented in the table. If the price of potatoes is $45/ $51/ $70 per tonne, will it sensible to
continue production: a) in the short run? b) in the short run? Explain your answer for each case. If
your aim is to maximize profit (or minimize loss) what volume of production will you choose and
why?
Crop, t AFC, $ AVC, $ ATC, $ MC, $
1 60 60 120 60
2 30 55 85 50
3 20 52 72 46
4 15 51 66 48
5 12 58 70 86
4.12) Does it make sense for a perfectly competitive firm to advertise? Explain your answer.
21
4.13) Which of the curves depicts the demand for the product of a firm on a perfectly competitive
market?
Q P Q
P Q P
4.14) Say you are planning to start you own telephone company. What kind of entrance barriers
will you expect to face on this market?
4.15)Which factors of supply and demand made a traditionally monopolistic market of local
phone services an oligopoly?
4.16) The state of Lichtenstein has only 3 cinemas. What type of competition is likely to exist on
this movie market? Why?
4.17)The pure monopolist can establish any price he wants since he is the only supplier of the
considered good or service and the demand curve is inelastic. Do you agree with this statement?
4.18) Can the monopolist decrease the price of every next good sold without decreasing the price
of the previous one? If yes, give your examples. If not, why? Why should monopolist decrease
the price so far?
4.19) The graph depicts the demand, marginal cost and average cost curves. Which additional
curve is necessary for establishing the price maximizing the profit of the monopoly?
P
MC
AC
4.20) Sayyou represent organs of power. Would you abolish the existence of monopolies in your
area? Why?
22
4.21) A cartel is an organization of several companies that is aimed at restricting competition and
raising the price. Imagine you are a member of cartel of construction firms in your locality. What
should you do in order to get unfair advantage? If you were a representative of authority
controlling the fair trade in the area, what would you do in order to prevent and reveal the cartel
agreement?
4.22) How may the following businesses act as cartels: a) banks? b) insurance companies?
c) reality firms? d) auto dealers?
4.23) Is
European automotive market competitive? What kind of market is that: an oligopoly or a
monopolistic competition? Explain your point of view.
4.24) The population of Usti nad Labem is around 100 thousand people. Say average family
consists of 4 people and spends $200 a week in local supermarkets. Calculate the Herfindahl
index for 2, 4, and 6 biggest firms, given the following data for supermarkets‘ market share
calculation. Interpret this figure.
Supermarket name Average weekly sales, $ thous.
Tesco 4 000
Hypernova 3 400
Kaufland 3 000
Globus 2 900
Plus 2 800
Lidl 1 700
Others 2 200
4.25) The following table presents the general purpose credit and debit card usage in Europe in
2003. Calculate the market power of index of the 2 and 4 biggest card operators.
Cash and purchase volume,
Card type
€ billion
Total 2 160
Maestro 970
Visa 700
MasterCard 270
Visa Electron 180
American Express 34
Diners Club 6
4.26) Think of examples of world-known firms that maximize their profit and fight against
competitors by: a) increasing their prices; b) decreasing the product prices; c) improving the
quality of their product or service; d) actively advertising their product; e) cutting the costs?
4.27) It is known that transportation costs declined substantially compared to what it has been
e.g. 30 years ago. What impact do lower transport costs have on market power of different firms?
How do communication technologies influence the market power?
4.28) Think about the reasons, why Adidas, RBK and Nike dominate on the market? What
distinguishes these firms from all the rest?
23
4.29) Define the market for McDonald‘s business in whole and for local McDonald‘s restaurant
in your hometown (name geographical boundaries, main consumer groups and competitors).
What type of market competition is typical for McDonald‘s? Can a local Italian restaurant be
called a substitute for local McDonald‘s? And what if this Italian restaurant is 100 km away
from it?
4.30) A: Say you are a local mobile phone operator. What will you do in order to discourage
other competitors to enter your market (what entrance barriers will you prepare for them)? B: Say
you represent the local authority. What will you do in order to encourage new phone operators to
come to the market (how will you make this market competitive)? Why would you do that?
4.31)
What is more important: price competition or quality and design competition? What keeps
McDonald‘s from raising prices? What can you say about quality of this food?
4.32)Explain why buying honey in a far away village is likely to be much cheaper than buying
honey in the local supermarket?
24
5 Introduction to Macroeconomics.
Measuring output
basic macroeconomic definitions | nominal national accounting aggregates | double counting issue | issues of growth

a) What is the difference between micro- and macroeconomics? How are these two fields related
to each other?
b) Name the main economic agents studied in macroeconomics. What issues are being studied by
macroeconomics?
c)What‘s the difference between gross domestic product (GDP) and gross national product
(GNP)? What do policymakers need the GDP (GNP) estimation for?
d) How do you understand the ―double counting‖ issue while estimating aggregate output? What
is the way to eliminate double counting?
e)What approaches to estimation of GDP (GNP) do you know? Describe them. How can GDP
measure both the economy‘s income and the expenditure on its output?
f) What is the difference between the capital good and final consumption good? What do
economists call an intermediate good? Give your own examples of such commodities.
g) * What do you think are the main data sources providing information for national accounting,
in particular for calculating GDP (GNP)?
h)What is the difference between gross domestic product (GDP) and net domestic product
(NDP)? Why NDP is being calculated?
i)If two countries have the same level of GDP, can we say that those countries are equally well
off? What indicator makes it clearer?
a) * What is ―potential GDP‖? How do you think economists calculate the potential GDP figure?
j) Whatare the main shortcomings of a GDP? What does GDP measure and what it doesn‘t? Can
we use GDP as a welfare indicator? Explain your answer.
k)
Starting with GDP, how can you calculate national income (NI) and disposable income (DI)?
What is the difference between NI and DI?
25
l) Whatis a business cycle? What four phases of a business cycle can you name? What is peculiar
about each of them? How can you determine in which phase of business cycle the national
economy is? What phase is your country currently in? What would you do that for?
Exercises
5.1)What macroeconomic issues have you heard about in your national news lately? What does
your government plan to do about that?
5.2) Which statements belong to microeconomics and which belong to macroeconomics: a) the
total output of Dombey and Son, Ltd. has increased by 23 percent last month; b) the government
liberates prices in agriculture; c) the minimum wage rate has reached its historical maximum;
d) the successful marketing campaign has attracted additional customers; e) the budget deficit can
be covered by international loans; f) the oil extracting industry has increased the volume of daily
output.
5.3) Think of your own examples of gross investment and net investment made by a company
providing taxi services. Explain why NDP indicator is so interesting to economists?
5.4) Think about what is the value added created by a) a grocery store? b) a pizza restaurant?
c) a real estate firm?
5.5) The table presents a simplified model of a small no-tax economy producing beef. Fill in
missing fields, calculate GDP and compare it to other total indicators in the bottom line of the
table.
Production stage Product market price Intermediate product Value added
Cow-calf operation 100 -
Livestock auction 200 100 100
Feedlot operation 250
Packing plant 400
Fabrication 450
Supermarkets and restaurants 900
Total
5.6) Which one of indicators GDP or GNP is more suitable for the USA? What about the
Northern Korea? Explain your answer. What indicator is more suitable for your country?
5.7)
What is greater: GDP or GNP? Explain your point of view. How do you think GDP and
GNP of you country are related to each other?
5.8) During a year a small nation produces the following goods and services. In what units may
the following quantities be represented? Calculate the nominal GDP.
Price Quantity
Item
($ per unit) (units)
Cars 1000 10
Shoes 100 100
Food 2 10 000
Medical services 30 1000
26
5.9) What do you think, what happens (or is likely to happen) to level of GDP if: a) hurricane
destroys buildings on the seashore? b) oil spill involves ecological catastrophe? c) house maid
cleans the house? d) farmer grows tomatoes for personal consumption? e) housewife cleans the
house? f) illegal copy of Windows is sold on the grey market? g) government passes the new
environmental law that restricts emission of greenhouse by producers?
5.10) Classify the following as consumption, investment, or government expenditure from

national accounting point of view: a) Mr. Jenkins buys a new family van; b) farmer buys a new
tractor; c) Mr. Novak hires a limo for his daughter‘s wedding; d) bakery buys a side-load truck;
e) president‘s administration rents an apartment for foreign consultant; f) Tesco has bought a lot
of copies of Star Wars books that are laying among other warehouse inventories.
5.11) Think of your own examples of transactions that may be classified as consumption (C),
gross capital formation (I), government final consumption expenditure (G), export (X), import
(Im), and governmental transfer payment.
5.12) Can the net export indicator be negative? Explain your answer. How do exports and imports
influence the national production?
5.13) Say you have sold you collection of stamps to your friend for $100. How did it affect this
year‘s GDP indicator? Explain your answer.
5.14)The sum of expenditure by consumers, business, and government is $100B. Exports are
$10B and imports are $15B. Determine what approach will you use to find GDP? Calculate GDP.
Explain, why did you use the net export figure for calculations?
5.15) In 2006 household expenditures in EU 27 were 57.8 percent of GDP, gross capital
formation 21.1 percent, and general government expenditure 20.8 percent. Define the net export
share.
5.16) Imagine a small closed economy. The oil rig provides oil to the refinery for $10M. The
refinery sells the produced gasoline to the gas station for $15M and the gasoline production by-
products to the chewing gum producer for $5M. What is the GDP of this economy if the gas
station sells the gasoline for $20M and chewing gum is sold for $10M?
5.17) A forest cutting company sells wood to the paper producer for $1M. The paper producer
sells the paper to the Central Bank for $2M. Using this paper the Central Bank prints additional
$1 000M. Calculate the GDP of this economy before the Central Bank emits the money,
supposing that value added by a Central Bank amounts to $1M.
5.18) GDP of an economy is $100B. National statisticians have calculated that foreign residents
working in the country have earned $1B during this year. On the other side the residents of this
country working abroad have earned $2B. Calculate GNP for this country.
5.19)Explain why the following components are being subtracted in the formula of national
income: NI = GNP – Depreciation – Indirect Business Taxes.
27
5.20) Should the following components be subtracted or added to national income in the formula
of disposable income: (Dividends − Corporate Profits); (Government Transfers to Individuals −
Social Insurance Contributions); and (Personal Tax and Nontax Payments). Explain why?
5.21) What is the difference between government purchases and transfer payments? Think of
your own examples.
5.22) GNP is currently equal to $4 500B. Consumption is $3 000B, and government purchases
are $1 000B. If Net Exports are zero, how much is gross capital formation?
5.23) Calculate the 2006 GDP of Turkey using the data presented in the table (constant 1990
prices). Note: some items are excess.
Type of Expenditure Value, $B
Household consumption expenditure 203
General government final consumption expenditure 29
Gross capital formation 79
Gross fixed capital formation 72
Changes in inventories 7
Exports of goods and services 99
Imports of goods and services 114
Source: http://data.un.org
5.24) Calculate the GDP of the country using the data presented in the table (billion USD). Note:
there are some excess items. Define what the Import of goods and services was in this year. Say
fixed capital consumption was $5B, estimate the NDP indicator.
Item Value, $B
Social contributions of employers 10
Household consumption expenditure 25
General government final consumption expenditure 9
Gross capital formation 14
Compensation of employees 35
Changes in inventories 4
Exports of goods and services 64
Net export 2
5.25) Find an inappropriate item in the following General government final consumption
expenditure: a) new Boeing purchase; b) purchase of a new yacht for presidential meetings;
c) purchase of a new townhouse by one of the ministers; d) purchase of software for parliament
security service.
5.26) If the economy is currently in a trough phase of the business cycle, what phase would you
expect to be the next: peak, recovery, or recession?
5.27) It is a known fact that (real) GDP follows a seasonal cycle. Think about the reasons for it
and give your own examples of seasonally influenced economic activities.
28
5.28) Say this is all the data you could find on internet about the Czech Republic economic
activity in 2006 (2000 constant prices, trillion CZK). Can you define the GDP for 2006? If yes,
also try to estimate the level of NDP. What was the Net investment level?
Value,
Item
thous. CZK
Compensation of employees 1,4
Gross fixed capital formation 0,8
Social contributions of employers 0,3
Taxes on productions and imports 0,4
Gross operating surplus and mixed income 1,5
Gross capital formation 0,8
Net operating surplus and mixed income 1,0
General government final consumption expenditure 0,5
Fixed capital consumption 0,6
Household consumption expenditure 1,4
Wages and salaries 1,0
Changes in inventories 0,1
Net export 0,0
Source: http://www.czso.cz
5.29) The following table presents the GDP of Hungary for several years (constant 1990 prices,
billion USD). Draw a line chart of GDP development. Find GDP growth rates. What can you say
about the economic situation in Hungary? What phase of business cycle the Hungarian economy
is in?
Year 2004 2005 2006
GDP, $B 47 49 51
Source: http://data.un.org
29
6 Inflation
inflation | real and nominal aggregates | deflator | consumer price index | interest rate

a)What can you buy for $10 today and what could you buy for this money 10 years ago? What
happened? How do economists call this phenomenon? What is the difference between ―nominal‖
and ―real‖ measures?
b)What is the difference between nominal GDP and real GDP? How can you calculate real
GDP? Why is real GDP important for decision-makers?
c) When calculating the real GDP indicator, why instead of money measurement (that is highly
influenced by the inflation) can‘t we just use the data on goods and services production in
physical units?
d) How do you understand the expressions ―change in volume‖ and ―change in price‖? How are
they connected with real and nominal GDP?
e)What is a price index? What is base year and what is current year? What do we need a base
year for? In what units can one measure the price index?
f)
What is inflation? How can one estimate the inflation? Suppose you are a policy-maker, what
would you need this indicator for?
g) Describethe consumer price index (CPI), producer price index (PPI) and the deflator. What do
they have in common? What is different about them? What is the most peculiar about the
deflator? Why PPI is not suitable for analyzing consumer market? If you were a policy-maker
what would you need these indexes for?
h) What is average market basket of goods? If you were a national statistician, how would you
approach to definition of market basket of goods of an average household? How would you
determine the cost of an average basket of goods? How would you collect data on prices? What
does ―weighting‖ mean?
i) What does the term ―constant price‖ mean? How can you switch from current to constant
prices?
j) Explain how does inflation reduce the purchasing power of money? Give an example.
30
k) What are the main factors influencing inflation? How can you explain the statement, that one
of the reasons for inflation is the fact that everyone expects it? How does the political climate
influence the inflation?
l) What are the consequences of inflation? Who ―suffers‖ from inflation most of all? Who ―wins‖
due to inflation existence?
m) What is an ―interest rate‖? What is the difference between the real and nominal interest rates?
How can you approximate a real interest rate using inflation rate and nominal interest rate?
Exercises
6.1) If nominal GDP has doubled in comparison with the previous year, what happened to the
real GDP in this case (ceteris paribus)?
6.2) Can the real GDP increase while the nominal GDP has actually decreased in comparison
with the previous year? Explain your answer.
6.3) The Central Bank of Zimbabwe issued bank notes with nominal value of 100 billion local
dollars. What could have forced it to do that?
6.4) What groups of goods would you include into the basket of goods of an average
household? What differences can one likely find between the average baskets of goods of
American and English households? If a decade ago average baskets of goods contained such
items as videocassette players, tape-cassette recorders and film cameras, what do you think they
contain now? What do you think which items are the most ―stable‖ in this list? Why not to select
a new market basket every year?
6.5) 20 years ago a cell phone cost $2000. Things have changed and now its price is between
$50-$300. How did this fact affect the CPI? Do you think a cell phone was included into basket
of goods 20 years ago? What type of good it was at that time?
6.6) Estimate the inflation rate for 2007 if CPI for 2006 was 110 and for 2007 it was 115.
6.7) Can use of CPI overstate or understate inflation rate? Explain your answer.
6.8)
Say you heard in the business news that the price index in the steel industry is 150 percent.
What does it actually mean?
6.9) If the price index of a DVD recorder is 0.9, what can you say about the change of price of
this product?
31
6.10) The table presents prices of 4GB USB flash memory cards in USD over time. Calculate the
price indexes for each year assuming that 2006 is a base year.
Year 2004 2005 2006 2007 2008
Price, $ 450 200 50 30 20
Price index, %
6.11) Table presents the CPI data for Belorussia. Calculate the yearly inflation rate between
2001-2002, and 2003-2004. Say a sack of potatoes in 2004 cost 150 rubles and in 2005 — 160
rubles. Define when the sack of potatoes was more expensive in real terms (in constant 2000
prices).
Year 2000 2001 2002 2003 2004 2005 2006
CPI 100 161 230 295 348 384 411
Source: http://laborsta.ilo.org
6.12) The salary of the USA president in 1946 was $75 000. Today it is around $400 000. Is Mr.
President better off today than 60 years ago? Use the data in the following table for explanation.
Year 1946 1982 2007
CPI 19 100 207
Source: http://www.bls.gov, http://www.senate.gov
6.13) The following table presents the economic data from Poland. Calculate the real GDP and
compare it with GDP in current prices. Is nominal GDP a misleading indicator? What was the
real development trend of the Polish economic activity during the whole considered period?
Year 2000 2001 2002 2003 2004
GDP in current (market) prices, €B 186 212 210 192 204
Deflator, % 100 113 110 97 98
6.14) The following table presents the South Africa‘s real GDP growth rates. In what units are
the growth rates measured? Think about and tell in which of the presented years the real GDP
was at its highest level? Explain your answer.
Year 1999 2000 2001
Real GDP growth rate 2.4 4.2 2.7
Source: African Economic Outlook; http://www.oecd.org
6.15)Look at the data about the basket of goods and services of an average household in a fake
economy. Calculate the fixed weight consumer price index (CPI).
2007 2008
P Q P Q
Bread 5 1000 6 1000
Shirt 20 100 19 100
Rent 500 100 510 100
Gasoline 2 1000 2 1000
32
6.16) Look at the data on the average basket of goods and services of an average household the
way the national accountants do. The column ―Weight‖ represents the share of expenditure on a
particular commodity in total household expenditure. The year 2007 is a base one. The ―Price
index‖ column presents the change of prices of single consumption items. Calculate the fixed
weight CPI for 2008.
Item Weight, % Price index 2007 Price index 2008
Food 15 100 102
Clothes 5 100 104
Housing 25 100 100
Health 5 100 101
Transport 15 100 102
Recreation 15 100 105
Other 20 100 101
Total 100 - -
6.17) The fake economy is producing only milk and bread. Given the following data on
production volumes and prices of these commodities calculate the nominal and real GDP
(assuming 2007 is a base year). Is the economy better off in 2008? Which indicator better reflects
the economic reality? Why?
2007 2008
P Q P Q
Milk 5 1000 6 1200
Bread 2 2000 4 1700
6.18) Imagine a fake economy, where only French fries and notebooks are being produced. Using
the information from the table calculate the nominal and real GDP and a fixed weight CPI
assuming that 2007 is a base year. Calculate implicit deflator using real and nominal GDP
indicators and explain why implicit deflator differs from fixed weight CPI? (Note that in practice
national statisticians use far more sophisticated techniques for calculations; see e.g. chain-
weighting).
2007 2008
P Q P Q
French fries 1 10 000 2 11 000
Notebooks 1 000 100 1 200 120
6.19) In a fake economy only two goods are being produced — bread and butter. Complete the
missing cells in the following table assuming 2007 is a base one.
Bread Butter Nominal Fixed weight
Year Real GDP
Price Quantity Price Quantity GDP CPI
2007 1 10 2 20
2008 2 15 18 84
6.20) Suppose you heard on TV that the Chinese real GDP annual growth rate has reached the
fantastic 8 percent. However in another news-block you get known that the inflation rate in China
is around 20 percent. How can you estimate the nominal GDP growth rate? Is Chinese economy
really better off this year?
6.21) Define the real change of the real GDP, if nominal GDP growth rate is 10 percent and the
price level has increased by 4 percent.
33
6.22) Say you have a $100 in your pocket. Supposing current year is a base one, estimate the real
value of your $100 in a year if the expected inflation rate is 4 percent per annum. What can you
do in order to save the value of your money?
6.23) The ticket to the movies cost $10. As a movie theater manager you have to keep an eye on
the pricing policy. You got known that the annual inflation rate this year is 3 percent. What
would be reasonable to do with the price of a ticket?
6.24) The nominal interest rate for deposits in commercial banks of the Czech Republic is 2.6
percent. Say the official inflation rate in the Czech Republic is 2.9 percent. What is the real
interest rate earned on bank deposits?
6.25) Suppose that the consumer price index went up from 120 percent to 150 percent during the
year. Year 2000 is a base year. In the beginning of the year your nominal wage is $10 an hour
and in the end of the year you get a rise that increases your nominal wage to $11. Calculate your
real wage in constant prices of year 2000 (using data on nominal wages and CPI) in the
beginning and at the end of the period and make a conclusion whether you are better off or not.
6.26) Explain the following fact from the viewpoint of economic theory: when the government
prints new money for its use, it makes the old money in the hands of the public less valuable.
Why do economists call this phenomenon an ―inflation tax‖?
6.27) Think about the following situation: what can you say about the inflation rates in the Czech
Republic and in Russia (note that currency exchange rate is close to 1), if Czech banks normally
offer around 3 percent annual deposit rate and Russian banks offer around 10?
6.28) In order to adopt euro the EU country must fulfill the Maastricht criteria. One of them, the
inflation rate criterion, claims that the inflation rate in the member country should be no more
than 1.5 percentage points higher than the three lowest inflation member states of the EU. The
following table presents the relevant data for Croatia with the base year 2000. Did Croatia meet
inflation rate criterion during in 2005 and 2006?
Year 2004 2005 2006
CPI 110 114 117
Reference inflation rate 2.4 2.2 2.8
Source: http://laborsta.ilo.org/
34
7 Unemployment
unemployment factors | structure of labor force | types of unemployment | unemployment and demography
Discussion points
a) Explain how population and labor force relate to each other.
b) Who is regarded to be unemployed according to the International Labor Organization (ILO)

definition? Think about how national statisticians may overestimate the unemployment figure
using such definition?
f) How can one measure the unemployment rate? What data would you need to calculate the
unemployment rate? Where and how would you collect it? Think about what practical issues
statisticians meet while collecting this information?
c) Define what is frictional, structural, cyclical, and seasonal unemployment? Name the main
reasons for their existence. What types of unemployment are present in your country? Give your
own examples of every type of unemployment. Can these types overlap? Give examples.
d) * Imagine you are a national statistician and you need to calculate seasonal, cyclical, structural
and frictional unemployment in the country. How would you approach to estimation?
e) Give examples of persons that can be classified as ―out of the labor force‖.
g) What consequences does the phenomenon of unemployment have? Are they all negative?
h)Think about how different types of discrimination influence unemployment. Think of your
own examples from your country. How does your government fight against discrimination?
i)Economists use the term ―natural rate of unemployment‖. Why is it ―natural‖? What types of
unemployment if summed up give the natural unemployment rate? Explain why.
j)What is unemployment insurance? What are the main reasons for unemployment insurance
existence? Speak about unemployment insurance program in your country.
Exercises
7.1) * Why did the classical economist believe the economy would always return to full
employment? Keynes believed that markets, particularly the labor market, adjust slowly. How
does this belief help to explain unemployment?
35
7.2)Think of the ways how the technical and technological progress contributes to
unemployment. What changes do these processes catalyze?
7.3) If the labor market of a fake economy may be characterized by high cost of geographical
mobility and the high cost of retraining, what type of unemployment is likely to be present in the
country? Do you have such type of unemployment in your country? In what spheres is it most
likely that such type of unemployment exists?
7.4) The official governmental statistics usually estimate number of unemployed by amount of
people claiming unemployment benefit in employment agencies. International Labor
Organization proposes a wider measure including those, who are without work but not claiming
the benefit among others. What advantages and disadvantages of the ILO method can you name?
7.5) Such expressions as ―not employed‖ and ―unemployed‖ are quite synonymous in everyday
life. Do they have the same economic sense? Who of the following persons is ―not employed‖
and who is ―unemployed‖: a) a 6 year-old kid? b) a student studying 24/7? c) a graduate returning
home from the job agency? d) a retiree? e) a housewife? f) a top manager taking some time off
before looking for a new position? g) a fired worker reading job vacancies page in a local
newspaper?
7.6) What kind of good is being sold on the labour market? Who is the seller and who is the
buyer? Think about what type of market competition (monopoly, monopsony, oligopoly, or
monopolistic competition) are the following groups of employees involved in: a) automotive
industry workers? b) presidents of the USA? c) sheikhs of the Saudi Arabia? d) secret spies who
would never betray their native country? e) geography teachers? f) popes of catholic church?
7.7) Use the standard supply-demand model and explain the following. How do employers
influence the salaries of those employees who have experience by discriminating young men with
no work experience and therefore not hiring them?
7.8)The average gross annual earnings in industry and services in Germany is around €40 000.
Average annual earnings in Slovakia is around €6 000. In the meantime Germany has introduced
number of limitations for foreign labor force to come to work there. Explain what could happen
on German labor market in case these limitations were abolished? Use the supply-demand model.
7.9) What is minimum wage rate in your country? If any exists, why did government introduce
it? What is an average wages (salaries) of a teacher, of a sales manager, of a worker of a plant? If
you were a national statistician what groups of people you wouldn‘t include in order to calculate
the average wages? If you did, what would have happened?
7.10) Classify the following as frictional, seasonal, cyclical, or structural unemployment:

a) the cook working at the spa is forced to take a non-paid vacation during the winter time;
b) currently unemployed secretary is waiting for the 1st of May to get started at a new job with a
higher hourly rate; c) the coal miners can‘t find a job after the mine was closed; d) people
standing in a row and waiting for any job offer during the Great Depression in the USA;
e) workers from automotive industries who lost their jobs after Ford, Chrysler and General
Motors started reducing costs.
36
7.11) Around 5 percent of employed people in the Inner London work in publishing and printing
services. What happens on this market along with development of Internet and information
technologies? What type of unemployment will most likely occur in the following decades here?
7.12)―Discouraged workers‖ are persons who would like to work and are available to do so, but
who do not look actively for work for various reasons. Generally, they are not considered as
unemployed in national statistics and they are out of labor force. What are the reasons for this
omission? How can national statisticians estimate the quantity of ―discouraged workers‖ in a
country?
7.13) The person is ―underemployed‖ in case he works but he is unable to find a job that uses his
skills and productive capacity to its full extent. Think of examples of such employees. Why
national statisticians usually classify such workers as ―employed‖? How would you approach to
estimation of the number of underemployed persons among the employed?
7.14) Think about what governmental polices may encourage and discourage employment in the
country? Think of concrete examples of governmental actions encouraging employment a) in
touristic business; b) in automotive industry; c) in educational sphere.
7.15)―The 5 percent unemployment rate signals that a country has reached a full employment.‖
Does this statement have economic sense? Explain.
7.16) According to national Labor Force Survey of 2006 there was around 1 086 thousand people
employed in Latvia (source: http://laborsta.ilo.org). Calculate the unemployment rate in the
country if labor force was 1 168 thousand people.
7.17) Say in a fake economy the population is 15 million people, a labor force is 10 million
people, and 2 million people are unemployed. Define the unemployment rate. Say the statistical
office has made a special survey and estimated that 5 percent of not in labor force people has
stated that they are ―discouraged workers‖. Calculate the new unemployment rate.
7.18) The graph presents the situation in Namibia in 2004 (in thousands). Find the following
indicators: not in labor force population, labor force, and unemployment rate.
37
7.19)The following table represents the 2006 labor force structure (thousands) in Saudi Arabia
and Sweden. Define which country is represented under A? What about B? Why do you think so?
Country Labor force Men Women
A 8025 6781 1244
B 4586 2405 2181
7.20)The following graph shows the Turkish population by age groups and gender, in 2000 and
2050 (forecast), in percentage of total population. What is peculiar about the contemporary
population structure and labor force? Think of the reasons why does it have such shape? Why
did United Nations specialists forecast such pattern of population structure in 2050?
in 2000 in 2050
TURKEY
MEN WOMEN
85+
80 - 84
75 - 79
70 - 74
65 - 69
60 - 64
55 - 59
50 - 54
45 - 49
40 - 44
35 - 39
30 - 34
25 - 29
20 - 24
15 - 19
10 - 14
5-9
0-4
,12 ,10 ,8 ,6 ,4 ,2 ,0 ,0 ,2 ,4 ,6 ,8 ,10 ,12
in 2000: 68,3 Total population (in millions) in 2050: 97,8
Source: OECD Demographic and Labor Force database, http://www.oecd.org
7.21) Thefollowing pyramids depict the population of Mexico and Sweden. Define which is
which. Think about the possible socio-economic problems existing in both states.
MEN WOMEN
85+
80 - 84
75 - 79
70 - 74
65 - 69
60 - 64
55 - 59
50 - 54
45 - 49
40 - 44
35 - 39
30 - 34
25 - 29
20 - 24
15 - 19
10 - 14
5-9
0-4
,12 ,10 ,8 ,6 ,4 ,2 ,0 ,0 ,2 ,4 ,6 ,8 ,10 ,12
MEN WOMEN
85+
80 - 84
75 - 79
70 - 74
65 - 69
60 - 64
55 - 59
50 - 54
45 - 49
40 - 44
35 - 39
30 - 34
25 - 29
20 - 24
15 - 19
10 - 14
5-9
0-4
,10 ,8 ,6 ,4 ,2 ,0 ,0 ,2 ,4 ,6 ,8 ,10
Source: OECD Demographic and Labor Force database, http://www.oecd.org
38
7.22) Look at the following graph presenting 2005 unemployment rates in percent in different
countries and comment, why mainly young people suffer most from joblessness? Why is 25 years
chosen as a border age?
Country Total <25 years 25+ years
Czech Republic 7,9 19,2 6,8
Poland 17,7 36,9 15,1
Slovakia 16,3 30,1 14,4
Italy 7,7 24,0 6,2
Germany 9,5 14,8 8,6
Denmark 4,8 8,6 4,2
Netherlands 4,7 8,2 4,1
39
8 Monetary Policy
money aggregates | central bank | monetary policy tools | money demand | money supply | anti inflation policy
Discussion points
a) What is money? Explain the following functions of money: a) medium of exchange,
b) standard of value, c) a store of value. Give examples based on your own experience.
b)Think of advantages and disadvantages of barter, commodity money, paper and electronic
money.
c) How do economists call the price of money? What factors influence the price of money? How?
d) Name the basic money aggregates. How do they differ? Think about why did economists
invent this classification?
e)Name the main factors influencing the demand for money. Give examples based on your own
experience.
f) What value do banks bring to their customers? Why do commercial banks exist by far? How do
banks ―create‖ the money: a) what is the required reserve ratio? b) what are its functions? and c)
what is the bank money supply multiplier? Explain this mechanism.
g) What is the difference between the Central Bank and the commercial bank? What are the main
functions of the Central Bank? What is the name of the central bank in your country?
h) How can you define a monetary policy? Who promotes the monetary policy in the state? Why
should the Central Bank have the certain extent of independency from the government?
i) Whatare Central Bank‘s open market operations, discount rate and reserve requirements policy
about? Why should the Central Bank keep the reserves? How Central Bank can increase the
money supply in the economy?
j)What is restrictive and expansive monetary policy? Give your own examples and describe the
possible situations when these actions are necessary.
Exercises
8.1)
Explain why the sack of potatoes performs the money functions during the hyperinflation
much better than the conventional bank notes?
40
8.2) The following table presents the time deposit rates offered by the Turkish Garanti Bank for
accounts in euro (from €1 000 up to €5 000 account limits). Why is the short term deposit interest
rate always lower in comparison with long-term deposits (think in terms of risk and return)?
Which money has a higher liquidity: a 1 month deposit or a year deposit? Why in case of €10 000
deposit the bank offers 1,5 percent rate for a 1 – 3 months period?
Term Interest rate
1 – 3 months 1,25
3 – 6 months 1,5
6 months – 1 year 1,75
Source: http://www.garantibank.com
8.3) You have a €1M in your pocket. The friend of yours owns a house worth €1M. Whose
property has a higher liquidity? What are advantages and disadvantages of keeping high liquid
money?
8.4) * If all commercial banks kept 100 percent reserves, would they ―create‖ the money?
Explain your answer. Suppose the opposite: if minimum reserve requirements were canceled,
would any voluntary reserve standards occur in single commercial banks? Explain your answer.
8.5)If the minimum reserve requirement is reduced by 1 percent, can the growth of generated
amount of money be greater than 1 percent (given banks carry no excess reserves)? Explain why.
8.6)Have you noticed what has been happening to the dollar lately? A decade ago a dollar was
primary reserve currency of majority of Central Banks of the world. What do you think is
happening now?
8.7) The minimum reserve requirements established by Magyar Nemzeti Bank (Central Bank of
Hungary) is 5 percent. Calculate how much money has been created in the economy by a banking
system, if the minimum reserves of commercial banks are €5M (given banks carry no excess
reserves)?
8.8) Which of the following do not belong to money aggregate M1: a) your pocket money?
b) long-term deposits in a local bank? c) current account money? d) checking account money?
e) money in the Pay-Pal internet payment system? f) grandma‘s savings hidden in a mattress?
g) state bonds owned by uncle Jenkins?
8.9) Say the fake economy is highly dependent on the foreign capital flows (making 40 % of
commercial banks‘ deposits). The minimum reserve rate is 10 percent. Say due to political
instability in the country the foreign investors decide to draw their money back. What is likely to
happen with the banking system in a country? Think of possible scenarios and consequences.
8.10) Draw a curve showing the demand for money (M1) related to the interest rate, assuming
that the only substitute for money M1 is saving account. Think about what will happen to
demand for money if: a) the food prices go up? b) aggregate income goes up? c) nominal and real
GDP go down? d) banks offer a higher saving accounts interest rate? What happens to the
demand saving accounts in each case? Explain why the quantity of money demanded decreases
as the interest rate rises.
41
8.11) Say the Central Bank of the Northern Korea controls the money aggregate M1 at the level
of 10B of Northern Korean wons. Draw the money M1 supply curve in the country (with an
interest rate on the y-axis).
8.12)How would the following Central Bank actions influence the money supply: a) increase of
minimum reserve rate? b) discount rate decrease? c) government bonds buyback in the open
market? How would it influence the interest rate?
8.13) What is the link between the money supply and the level of investment and income?
Describe this chain.
8.14) * Explainevery relation in the following graph. Give concrete examples using as macro- as
well as microeconomic reasons.
Source: http://www.bankofengland.co.uk
8.15) In which way are open market operations different from simple exchanging government
securities for money? How does this tool actually influence the money supply?
8.16) Say the Chinese economy is in threat of ―overheating‖. Imagine you are a Central Bank
governor: what set of monetary measures would you propose. Explain how each of them will
influence the interest rate, aggregate consumption, investment, and finally the real GDP. What
will happen to the money supply curve in this case?
8.17) Say a fake economy is facing the high inflation rates. As a Central Bank governor, what
policy mix would you advise in order to fight the inflation?
8.18) The target for inflation of National Bank of Poland is holding the ratio in the corridor
between 1.5 percent and 3.5 percent. Using the information in the following table say how
successful are the professionals from the National Bank of Poland?
Year 2005 2006 2007
CPI 112.2 114.6 115.8
Source: http://laborsta.ilo.org/
42
9 Fiscal Policy
fiscal policies | multiplier effect | anti inflation policy | budget, revenue and expenditure | government failure
Discussion points
a) Name the basic goals of macroeconomic policy. Explain why each of these goals is important.
It is well-known that these goals a quite controversial. Explain this statement and give your own
examples. Why is short-term Philips curve a good example of this overlapping?
b) *Look at the two provided models and explain the viewpoints of neoclassic economists and
Keynesians on the macroeconomic policy. Why do Keynesians stand for the fiscal policy and
neoclassic economists regard monetary policy to be optimal?
P P
AD AS AD
real GDP real GDP
c) How can you define a fiscal policy? Who promotes and executes the fiscal policy in the state?
How income and fiscal policies relate to each other?
d)Name the main types of budgetary revenues and expenditures. What is the deficit and surplus
budget? How can the deficit be covered?
e) What is restrictive and expansive fiscal policy? Give your own examples and describe the
possible situations when these actions are necessary.
f) Describe how do governmental expenditures influence the economy. Speak about marginal
propensity to consume and to save. What is multiplier of fiscal policy? Explain this mechanism.
g) What do economists call automatic stabilizers? Give examples of such stabilizers. What
actually do they stabilize? Why is it so important? Name the examples of discrete fiscal policy
measures. What are the advantages and disadvantages of discrete measures and automatic
stabilizers?
43
h) Do you think government failures are possible just like market failures? Think of your own
examples. Think of the reasons for the government failures. What role does the bureaucracy and
duration of decision-making process play in this case?
i)How do you understand the term ―social welfare‖ and how it differs from individual welfare?
Say you are a policymaker. What indicators will you use in order to estimate the level of
economic and non-economic welfare of your citizens?
Exercises
9.1) Say the marginal propensity to consume in the Czech Republic in 2006 was around 75
percent. How much would be saved of an additional €1M of income?
9.2) The GDP of a fake economy is €400B. Economists estimate the marginal propensity to
consume at the level of 0.8. As a policymaker you want to increase GDP up to the level of
€800B. Estimate the level of investment necessary to achieve this goal.
9.3) Think about how would the following events influence the aggregate demand: a) personal
income tax increase; b) growth of unemployment and social security transfers; c) high inflation
expectations; d) economic crisis prognoses; e) increase of overall price level. Show it using the
aggregate demand curve.
9.4) What is peculiar about the fiscal policy made by the government before the elections?
Explain your point of view.
9.5) The households play the role of suppliers on the capital market. In what form do they
―supply‖ capital: a) machines; b) land; c) buildings; d) money; e) raw materials; or f) final
products?
9.6) * Say the fake economy is in the recession stage of the business cycle. What macroeconomic
indicators witness this statement? What fiscal policy mix can you advise? Describe the scenario
how will these measures influence these indicators?
9.7) What is an appropriate fiscal measure mix concerning taxes and government expenditures at
the time of high inflation?
9.8) * Say as a policy-maker you need to prepare a package of fiscal measures aimed at
stimulating the aggregate supply. What macroeconomic indicators will you choose first to
analyze the situation? What measures will you include into your measure mix? Explain the
reasons.
9.9) Describe what happens to consumption, investment, and the interest rate when the
government increases a) VAT? b) income taxes?
9.10) The government makes social security and pension payments. How do these payments
influence the aggregate demand and production? Show it on the graph.
44
9.11) The economy of the Czech Republic has achieved remarkable improvements lately. The
confidence in tomorrow makes Czechs expect the further growth of income in future and
therefore actively consume today, e.g. using the bank loans. Think about how this increased
consumption may influence the investment and interest rate in the country?
9.12) * Explain why may the expansive fiscal policy increase the demand for money? How would
it affect the interest rate? How would it influence investment?
9.13) What types of automatic stabilizers (e.g. unemployment compensation, income taxation
scheme) are present in your country? Describe them. Explain why progressive income tax system
is more likely to stabilize the economy if compared to regressive tax system.
9.14) Direct taxes are borne and paid to government by the one and the same economic agent.
Indirect taxes on the other hand are borne and paid by different economic agents. Give examples
of such taxes in your country.
9.15)In order to adopt euro the EU country must fulfill the Maastricht criteria. Two of them, the
government finance criteria, claim that a) the ratio of the annual government deficit to gross
domestic product (GDP) must not exceed 3 percent and b) the ratio of gross government debt to
GDP must not exceed 60 percent. The following table presents the relevant data for the Slovak
Republic in billion Slovak crowns (SKK). Did Slovak Republic meet government finance criteria
during the period in question?
Indicator 2005 2006 2007
Government revenue 524 557 643
Government expenditure 565 617 683
Government debt (nominal value) 508 505 544
GDP 1485 1660 1852
9.16)1The following table represents the structure of 2006 central (federal) budget expenditures
of the two states – the USA and Sweden – in percent. Define which of them is marked as ―State
A‖ and which as ―State B‖? Explain your viewpoint. Which of these can be called a ―social‖
state? What does the item ―Interest‖ refer to?
Budget expense item State A State B
Defense 23 6
Education 5 5
Health care 22 22
Interest 9 5
Justice 2 4
Pensions 22 6
Transport 3 6
Unemployment benefits, child allowances, etc. 9 16
Other 5 29
Total 100 100
Source: http://www.sweden.gov.se, http://www.usgovernmentspending.com/
45
9.17) The following bar-chart presents the quarterly governmental expenditure in Bulgaria (in
billion Bulgarian levs (BGL)). Look at the graph and say what is peculiar about the governmental
spending during the year? Explain the shape of this bar chart. How can the governmental
expenditure be related to short-term business cycles?
25
20
15
10
0
20 1
20 Q2
20 3
20 Q4
20 Q1
20 2
20 Q3
20 4
20 Q1
20 2
20 Q3
20 Q4
20 1
20 Q2
20 3
20 Q4
20 1
20 Q2
20 Q3
20 4
1
Q
Q
03
03
03
03
04
04
04
04
05
05
05
05
06
06
06
06
07
07
07
07
08
20
9.18) The following table presents the 2007 budget of Romania (billion Romanian leus (RON)).
Give your own examples of each item on revenue side. The capital revenue item has a zero value
in a table: how should you understand this figure? Give as many examples as you can of what can
the item ―Sales‖ contain. Calculate the deficit. How can the government finance it?
Revenue Expenditure
Taxes 49 Intermediate consumption 11
. Indirect taxes 34 Compensation of employees 26
. Direct taxes 15 Interest 3
. Capital taxes - Subsidies 6
Social contributions 3 Social benefits 12
Sales 7 Other current expenditure 11
Other current revenue 12 Capital transfers payable 6
Capital revenue 0 Capital investments 11
Total 72 Total 85
9.19) The following table presents the data on the Czech Republic. Why regardless of the fact
that corporate taxes have always been among the primary budget revenue sources the corporate
tax rates are being consequently decreased?
Year 1996 1998 2000 2002 2004 2006 2008
Corporate tax rate, % 39 35 31 31 28 24 21
Budget deficit, M CZK -55 834 -100 061 -81 471 -166 774 -82 749 -85 458 n.a
Source: http://epp.eurostat.ec.europa.eu, http://ec.europa.eu/taxtrends
9.20) Think about the differences between the central and local budgets. Which expenditure
items that are present in the state budget are likely to be absent in the local one and vice versa?
What budget items are prioritized on the central level and what on local level?
46
9.21)One of the major advantages of markets is that they put pressures on employees of
competitive firms aimed at getting profit to be responsive to consumers. Think what motivates
employees in public sector? Explain why bureaucracy exists?
9.22) Imagine you are a policy maker. Make a cost-benefit analysis (i.e. define all advantages
and disadvantages and think about their monetary valuation) of the following measures:
a) prohibiting smoking in restaurants and bars; b) prohibiting coal mining; c) establishing high
import tariffs on used cars older than 3 years.
47
10International Trade and Economic
Relations
absolute advantage | comparative advantage | national economy competitiveness | international cooperation |
exchange rate | national trade policy
Discussion topics
a) What are the basic reasons why countries get involved into international trade? Speak about
absolute advantage and comparative advantage theories.
b) What are the main commodities and services being exported and imported in your country?
Name the few basic reasons for such structure of import and export. Think of resources of your
nation that could be the reason for an absolute/comparative advantage?
c) What is trade liberalization? What are tariffs, subsidies, and quotas? What are the main
economic and non-economic consequences of their implementation? Why do countries use the
protectionist measures?
d)What trade barriers are present in your country and what types of production are involved?
Explain the reasons for this.
e) Define fixed and flexible (floating) exchange rates. What is managed floating? What is
depreciation and appreciation? Name the possible reasons for currency depreciation. Why
exchange rates are normally so volatile?
f) What is the relation between the international trade and exchange rate policy? In what cases
interventions on foreign exchange markets are necessary?
g) What is economic integration? What examples of free trade areas, customs unions, common
markets and finally monetary unions can you name? What motivates countries to get involved
into such organizations?
h) How does your country participate in the process of economic integration? Name the
international organizations your country is a member of.
i) What is globalization? What are economic and non-economic advantages and disadvantages of
globalization?
48
Exercises
10.1) Imagine the 2 economies have the following production possibilities presented in the table.
Let‘s assume that both countries have equal number of units of labour that they fully use. What
types of advantages for international trade is presented here? What should Cuba specialize on?
Explain why, using opportunity cost approach. Define the margins of price for bananas and cigars
in case of international trade. Draw the production possibility frontiers for both countries before
trade. Draw the consumption possibility frontiers of both countries after the trade.
Bananas Cigars Opportunity cost Opportunity cost
Country
(thous. tones) (thous. boxes) of bananas of cigars
Ecuador 4 1
Cuba 10 3
10.2)The following table presents the labor inputs (in man-hours) for production of the two
goods in the two fake economies. Who has the absolute and comparative advantage in each
good? Define the good each of the counties should specialize on.
Opportunity cost Opportunity cost
Country Gin Tonic
of gin of tonic
A 2 4
B 4 2
10.3) U.S. producers supply nearly 75 percent of the total poultry import quota set by Russia,
which stands at 1.2 million tons. Why would Russia establish such quotas if American chicken is
30 percent cheaper than that produced by Russian farmers?
10.4) In what goods and services the following countries specialize taking part in international
trade: a) Japan? b) the Czech Republic? c) Cyprus? d) Russia? e) Switzerland? f) Germany?
g) Finland? h) Indonesia? i) Oman? Name the possible reasons.
10.5) Assume that the only good Germany exports to the Czech Republic are Volkswagen cars.
Think of the Czech crown (CZK) and Euro (€) foreign exchange market and name who demands
and supplies Euros. Draw a supply-demand model and show how the exchange rate is being
established.
10.6) The developed countries of EU actively practice countries‘ domestic support policies in
agricultural sectors (e.g. direct payments to farmers for a tone of corn). What are the reasons for
this protectionism? How do these measures influence the behavior of farmers? What
redistribution effects take place between the tax payers and farmers?
10.7) The environmental policy of the EU has been aimed at internalization of negative
ecological externalities lately (e.g. additional environmental taxes, fees, etc.). These measures
increase the costs of the companies in comparison with competitors e.g. from China, where
environmental legislation is not so strict. What are the possible consequences of EU
environmental legislation? If you were a policymaker what would you do in order to protect
European producers from low-cost competitors?
10.8) Why during recession phase of the economic cycle the governments may prefer
protectionist measures?
49
10.9) The following graph presents the market of meat in a small fake economy. Show the
domestic supply and world supply. What part of domestic demand is satisfied by domestic
production, and which part is covered by imports? Why can‘t domestic producers satisfy the
whole demand? Say the government establishes tariff. (Why would it do that?) How does it
influence price, import, domestic production and consumption of the meat importing country?
P D
10.10) Assume that Hollywood has an almost monopolistic position on the entertainment market.
Say the USA establishes the special tax on export of films (export tariff). Show how this step will
influence the situation on the world entertainment market using a supply-demand model?
10.11)The following table provides examples of several average import tariffs established in the
EU and in 5 other countries (in perents). What tariff policies are common among the
developed/developing countries? Explain in what fields do countries have low tariffs applied and
in what fields tariffs are high? Explain the zero cotton tariffs in Japan. Why does India have 133
percent tariff on tea? Why do Turkey and India have relatively high tariffs on minerals and
metals? Why electrical machinery is not so burdened by tariffs except for Turkey and India?
EU China India Japan Turkey USA
Dairy products 57 12 65 176 100 25
Coffee, tea 7 15 133 17 81 4
Cotton 0 22 110 0 80 5
Minerals & metals 2 8 38 1 46 2
Electrical machinery 2 9 27 0 53 2
Source: http://www.wto.org
10.12) There has been a huge increase in milk consumption in China lately. China has no
tradition of dairy farming, and there is a shortage of home-produced milk supply. A third of all
the milk produced worldwide is being transported to satisfy the demand of 1.3B Chinese. Much
of the milk is being exported form the EU and a significant amount from Germany. Draw a graph
showing domestic and world supply and domestic demand for milk in China. Think about how
the Chinese demand influence the price of milk in Germany? What should the German
government do in this situation?
10.13) If
Namibian dollar appreciates what will happen to the following transactions: a) export of
diamonds from Namibia to South African Republic? b) import of flour from the USA to
Namibia? How this appreciation will probably influence the net export?
10.14) What happens to the Czech crown (CZK) exchange rate if: a) more Czech people would
go on vacation to Croatia? b) more Americans will come to Prague for summer holidays?
c) the demand for used German cars will increase? Show it on the graph.
50
10.15) Say due to political crisis the Ukrainian economy faces the currency depreciation, since
foreign investors are actively selling the national currency. If you were a Central Bank governor,
what would you do in order to prevent national currency from depreciation?
10.16) The Czech crown (CZK) has been actively appreciating lately. What consequences does
this process have on the following economic agents: a) Škoda auto exporting its cars to
Germany? b) truck dealer buying the trucks in Sweden? c) souvenir shop selling bohemian
crystal to tourists? If the central bank wanted to fight against appreciation, what would it have
done?
10.17) Convert the following currencies into euro or vice versa where necessary:
Foreign currency Foreign currency per € € per foreign currency unit
US dollar (USD) 1,43
United Kingdom Pounds (GBP) 0,80
China Yuan Renminbi (CNY) 0,10
Oman Rials (OMR) 1,82
Source: http://www.xe.com; retrieved on 8.9.2008.
10.18) Try to name as many as possible ―pros‖ and ―contras‖ of the European monetary union
from view point of government, business and households. Why some countries are eager to enter
this union and some are not? How might a single currency encourage trade in the EU? Why one-
size-fits-all policy is not appropriate for every EU member state?
10.19) The Organization of the Petroleum Exporting Countries (OPEC) is a cartel made up of
thirteen countries (Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Nigeria, Qatar, Saudi Arabia,
Socialist People's Libyan Jamahiriya, the United Arab Emirates, and Venezuela). Today these
countries account for two-thirds of the world's oil reserves, and around 40 percent of the world's
oil production. OPEC is able to significantly increase or decrease the price of oil in the world
market. Explain how. How can the political instability in the Middle East influence the price of
oil? Show these mechanisms using supply-demand model.
10.20) * The Big Mac from McDonald‘s in the USA costs 3.57 USD and its price in the Czech
Republic is 66.1 CZK. The nominal exchange rate published in the economic news is 14.5
CZK/USD. Calculate the ―real‖ exchange rate. How can you explain this difference? What is the
difference between the nominal and real exchange rate?
51
References
Some problems discussed above were inspired by the following books:
Carbaugh, R. J. (1980) ‗International economics‘ (Cambridge, Mass.: Winthrop Publishers).
Dornbusch, R. Fischer, S. (1978) ‗Macroeconomics‘ (New York: McGraw-Hill).
Ferguson, K. (2002) ‗Essential economics a guide for business students‘ (Houndmills, Basingstoke, Hampshire; New
York: Palgrave).
Gordon, D. (2000) ‗An Introduction to Economic Reasoning‘ (Auburn, USA: Ludwig von Mises Institute).
Gwartney, J. D. (1977) ‗Microeconomics : private and public choice‘ (New York: Academic Press).
Hoag, A., Hoag, J. H. (2006) ‗Introductory Economics‘ (Singapore: World Scientific Publishing).
Kraft, J., Ritschelova, I. (2004) ‗Ekonomie pro environmentální management (In Czech: Economics for
Environmental Management)‘ (Ústí n. L, Czech Republic: UJEP).
Lewis, M. A., Widerquist, K. (2001) ‗Economics for social workers the application of economic theory to social
policy and the human services‘ (New York: Columbia University Press).
Mankiw, G. (2000) ‗Macroeconomics‘ (New York: Worth Publishers).
O‘Connor, D. E. (2004 ) ‗The Basics of Economics‘ (Westport, USA: Greenwood Press).
Ritschelova, I. et al. (2004) ‗Úvod do ekonomiky životního prostředí (In Czech: Introduction to Environmental
Economics)‘ (Ústí nad Labem, Czech Republic: UJEP)
Sadlik, J., Korytarova, J. (2006) ‗Základy ekonomie - cvičebnice: pro kombinované a prezenční studium (In Czech:
Economics Basics – exercise book for distant and full-time students‘ (Brno: CERM).
Samuelson, P. A., Nordhaus, W. D. (1985) ‗Economics (12th Edition)‘ (New York: McGraw-Hill).
Thompson, H. (2001) ‗International economics: global markets and international competition‘ (Singapore; River
Edge, N.J.: World Scientific).
Tribe, J. (2004) ‗The Economics of Recreation, Leisure and Tourism‘ (Oxford, UK: Butterworth-Heinemann).
Tchepurin, M. N. et al. (2007) ‗Sbornik zadach po ekonomicheskoi teorii: mikroekonomikai makroekonomika. (In
Russian: Book of economic theory problems: microeconomics and macroeconomics)‘ (Kirov: OOO ―ASA‖).
Wilkinson, N. (2005) ‗Managerial economics: a problem-solving approach‘ (New York: Cambridge University
Press).
52
Name: General Economics: Exercise Book
Author: Egor Sidorov
Publisher: Jan Evangelista Purkyne University in Usti nad Labem
Printed by: MINO, Usti nad Labem
Print run: 150
No. of pages: 53
Year of publishing: 2008
ISBN: 978-80-7414-057-0
53

Exercise Book PDF

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Exercise Book PDF

Transféré par

Droits d'auteur :

Formats disponibles

General Economics:

Ústí nad Labem, 2008

© Egor Sidorov — Ústí nad Labem, 2008

The book is primarily focused at economic phenomena of developing and transforming

Ing. Jakub Vosatka, Ph.D.

Points for discussion

Points for discussion

Points for discussion

i) What is the difference between technical and economic efficiency?

3.12) Using available data fill in all the blank cells.

g) Why is monopolistic competition ―monopolistic‖?

Points for discussion

5.10) Classify the following as consumption, investment, or government expenditure from

Points for discussion

b) Who is regarded to be unemployed according to the International Labor Organization (ILO)

7.10) Classify the following as frictional, seasonal, cyclical, or structural unemployment:

in 2000: 68,3 Total population (in millions) in 2050: 97,8

Source: OECD Demographic and Labor Force database, http://www.oecd.org

Source: OECD Demographic and Labor Force database, http://www.oecd.org

real GDP real GDP

Carbaugh, R. J. (1980) ‗International economics‘ (Cambridge, Mass.: Winthrop Publishers).

Dornbusch, R. Fischer, S. (1978) ‗Macroeconomics‘ (New York: McGraw-Hill).

Mankiw, G. (2000) ‗Macroeconomics‘ (New York: Worth Publishers).

O‘Connor, D. E. (2004 ) ‗The Basics of Economics‘ (Westport, USA: Greenwood Press).

Vous aimerez peut-être aussi