Assignment 2-ECON201

Kingdom of Saudi Arabia Ministry of Education Saudi Electronic University ةيدوعسلا ةيبرعلا ةكلمملا ميلعتلا ةرازو ةينورتكللا ةيدوعسلا ةعماجلا College of Administrative and Financial Sciences Assignment 2 Macroeconomics (ECON 201) Release Date: 22/01/2023 -Deadline: 11/02/2023 @ 23:59 Course Name: Macroeconomics Student’s Name: Abdul-Rahman Elseloly Course Code: ECON201 Student’s ID Number: S200238027 Semester: IInd CRN:22051 Academic Year:2022-23-IInd For Instructor’s Use only Instructor’s Name: Dr Students’ Grade: / 15 Level of Marks: General Instructions – PLEASE READ THEM CAREFULLY  The Assignment must be submitted on Blackboard ( WORD format only ) via allocated folder.  Due date for Assignment 2 is by the End of Week 10 (11/02/2023)  Assignments submitted through email will not be accepted.  Students are advised to make their work clear and well presented; marks may be reduced for poor presentation. This includes filling your information on the cover page.  Students must mention question number clearly in their answer.  Late submission will NOT be accepted.  Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.  All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).  Submissions without this cover page will NOT be accepted.

Assignment 2 (15 Marks) 1. Suppose people consume 3 different goods. The following table shows the prices and quantities of each good consumed in 2019, 2020, and 2021. a. Calculate nominal GDP in each of the three years. (2 Marks) b. Calculate Real GDP in each of the three years, using 2019 as the base year. (2 Marks) c. Calculate the rate of inflation for 2020 and 2021 using the GDP deflator as your price index. Assume that 2019 is still the base year. (2 Marks) d. Using the quantities from 2019 for your market basket, and 2019 as your base year, calculate the CPI for 2019, 2020 and 2021. (2 Marks) e. Using the CPI calculate the rate of inflation. (2 Mark) 2. Suppose GDP equals $09 trillion, consumption equals $3 trillion, the government spends $2.5 trillion and has a budget deficit of $450 billion.  Try to find public saving, taxes, private saving, national saving, and investment. (3 Marks) 3. What is the Catch-Up Effect. Explain it by giving some Examples. (2 Marks) Year Price of Pizza Quantity of Pizza Price of Burger Quantity of Burger Price of coffee Quantity of Coffee 2019 $ 8 350 $ 10 200 $ 8 150 2020 $ 10 500 $ 12 250 $ 10 250 2021 $ 13 700 $ 14 400 $ 15 400

GDP Deflator = Nominal GDP / Real GDP * 100 2019 = Nominal GDP 2019 / Real GDP 2019 * 100 2019 = 6,000 / 6,000 * 100 = 100% 2020 = 10,500 / 8,500 * 100 = 123.53 % 2021 = 20700 / 12800 *100 = 161.72 % Calculating the inflation rate: Inflation rate 2020 = ( Current year – Past year) / Past year *100 Inflation rate 2020 = (123.53 – 100) /100 *100 = 23.53 Inflation rate 2021 = (161.72 – 123.53) /123.53 *100 = 30.92 ( E) Using the CPI calculate the rate of inflation. (2 Mark) CPI = Cost of goods for the current year / Cost of goods for the base year *100 CPI 2019 = ( 8 *350 ) + ( 10 * 200 ) + ( 5 *150) *100 = 100 ( 8 * 350 ) + ( 10 * 200 ) + ( 8 *150 ) CPI 2020 = ( 10 *350 ) + ( 12 * 200 ) + ( 10 *150) *100 = 123.23 ( 8 * 350 ) + ( 10 * 200 ) + ( 8 *150 ) CPI 2021 = ( 13 *350 ) + ( 14 * 200 ) + ( 15 *150) *100 = 160 ( 8 * 350 ) + ( 10 * 200 ) + ( 8 *150 ) Calculating rate of inflation: Inflation rate 2020 = ( 123.33 -100 ) /100 *100 = 23.33

Inflation rate 2021 = ( 160 -123.23 ) /123.33 *100 = 29.73 Question (2) : Given: GDP = $ 9 Trillion - Consumption = $ 3 trillion - Government Spending = $ 2.5 trillion Budget deficit = $ 450 billion. Try to find public saving, taxes, private saving, national saving, and investment Calculating Public Savings: Government Deficit = G - T 0.45 = 2.5 – T Then Taxes ( T) = 2.5 – 0.4= 2.05 trillion Public savings = T – G Public savings = 2.05 – 2.5 = - 0.45 Trillio n Calculating Investment: As Y = C + I + G Then I = Y – C – G Investment ( I ) = 9 – 3 – 2.5 Then investment ( I ) = $ 3.5 Trillion. Calculating the Private Saving: Private saving = Y – T – C Private saving = 9 – 2.05 – 3 Private Savings = $ 3.95 Trillion Calculating the National Savings: National Savings = Pubic Savings + Private savings National Savings = -0.45 + 3.95 National Savings = $ 3.5 Trillion. Another method to calculate the national savings

= $0.2 + $0.5 = $ 0.7 Investment = Savings = $0.7 Private S = ( Y – T – C ) C = Y - T - Private S C = $8 - $1.5 - $0.5 = $6 Public S = ( T - G ) G = T - Public S G = $1.5 - $0.2 = $1.3 Answer ( Q3): The concept of Catch-Up Effect as an economic concept refers to the property in which the poor countries are tending to grow more rapidly than the rich ones. The main reasons that cause this effect can be clarified as follows: Firstly, the increase in the productivity in the poor or the under-developed countries due to the use of the modern production methods and emerging technologies in production processes which is called as a second-mover advantage, which cause a rapid growth that exceeds the growth that occurs in the developed countries that already have these technologies and become familiar with using them in their production processes.

-Another reason behind this theory is the law of diminishing marginal returns. Which is based on idea that the country is investing and the amount that is yield that is received from the investment will be declined as the level of investment will be increased. Hence, in every time the country will invest, the benefit that will be generated from the investment will be reduced. Therefore, the returns on the capital investment in the rich countries will not be large like the poor or the developing countries. Example for catch-up effect: Japan and other Asian countries that before are importing their technologies and other imports from USA, in period of 1970s, these countries have succeeded to achieve a noticeable economic growth due to the emergence of technologies in their factories and increase their productivity which sound well in the overall economic. Another example is clear in Taiwan and South Korea that have achieved a radical improvement in their economies that exceed USA and other big companies that have great abilities and manufacturing infrastructures. References: -Eisenstein, C. (2011). Sacred Economics: Money, Gift, & Society in the Age of Transition . Evolver Editions.