ECO 104: INTRODUCTION TO MACROECONOMICS, FALL 2013

SECTIONS 6 & 15
ASSIGNMENT NO. 2
FACULTY: MS SIFAT ADIYA (SDY)
TOTAL MARKS: 40
rd
DUE DATE AND TIME: 3 LECTURE FROM FRIDAY, 6TH DEC 2013 DURING
CLASSTIME
Answer all questions.
You can write or type your answers. If you hand write the answers, please make sure your handwriting is legible.
You MUST submit the assignments with yourName, ID number, section number and the name
of your faculty. Start writing from the second page.
You will be reminded about the assignment in the last class before due date.

Local GDP ranking climbs

Baltimore ranked 19th among metro areas in 2005 on an important measure of economic activity - up one
notch from the year before.
The numbers, released yesterday by the Commerce Department, represent the government's first-ever
attempt to calculate gross domestic product for the country's 363 metropolitan areas. GDP is a tally of the
value of goods and services produced.

The government warned that the numbers are "experimental," but it intends to continue producing them.
"There are many metropolitan areas that haven't seen an estimate of the size of their economy, and they
don't have a clear picture of how their economy ranks," said Sharon Panek, chief of the section on GDP
by state services at Commerce's Bureau of Economic Analysis. "The number of requests we've received
over the years has been overwhelming."
The Baltimore metro area's GDP was nearly $120 billion in 2005, outpacing St. Louis, which ranked 19th
in previous years, but far behind the nation's largest metro areas. New York, at about $1 trillion, was
first; Los Angeles, second with about $630 billion; and Chicago, third with about $460 billion.
Washington, with just under $350 billion in GDP, ranked fourth.
The top metro areas by GDP are also the top by population. Baltimore is 20th among metro areas by
number of residents. But the Baltimore area's economy has grown more slowly than the average for metro
areas in the past several years. GDP increased 2.8 percent here in 2005, compared with 3 percent for the
nation's metro areas overall. The numbers are adjusted for inflation.
Richard P. Clinch, director of economic research at the University of Baltimore's Jacob France Institute,
said Baltimore's growth was lower than he expected, but he noted its slower-than-average population
growth is a key reason.
"It's largely a function of population growth," he said of GDP.
Some metro areas grew by leaps and bounds. GDP increased by more than 10 percent in parts of Florida,
Washington state and Arizona, for instance.
But Clinch said Baltimore compared well with some of its Rust Belt peers, such as Detroit, Pittsburgh and
Cleveland - which each grew by less than 1 percent. The ripple effect from Washington, which had
growth of 5 percent, could help explain why.
"Being in the shadow of Washington isn't necessarily a bad thing," Clinch said.
The Commerce Department also released statistics showing how various industries contribute to metro
areas' economic growth. In the Baltimore area, the education and health services sector and financial
activities were key drivers, with each accounting for about 12 percent of the increase in 2005. About 9
percent of the growth came from construction.
But the department withheld data about one of Maryland's key sectors, professional and business services.
It said it did so in cases where one business is so dominant that the numbers could reveal confidential
information.

Questions:
1a) What is GDP? Explain the relationship between GDP and size of economy?
3 MARKS
1b) Explain and elaborate the main factor/factors that influenced GDP of Baltimore in 2005.
4MARKS
1c) Using your slides, explain what problems can we face when comparing GDP between inter cities of
USA?
3MARKS
1d) What does the bold and underlined part in the article signify? Why do we need to adjust GDP values
with inflation?
2 MARKS

2. Explain whether each of the following events shifts the SRAS curve, or AD curve, or both SRAS and
AD curve, and neither of the two curves in USA. For each event that shifts a curve, draw a graph and
mention what is happening to PL and Real GDP in the economy.
(i) Households decide to save a larger proportion of their income.
(ii) The orange groves of Florida face a long period of below-freezing temperatures.
(iii) Increased job opportunities overseas cause many people to leave the country.
8 MARKS
Japan Disaster Threatens Economic Recovery, Affects Economies Globally
William Alden
www.huffingtonpost.com
15th March 2011
The disaster in Japan threatens to significantly impede the nation's economic recovery, perhaps spreading
to other nations, say economists.
The worst devastation from the earthquake and tsunami is concentrated in the northeast of Japan, but the
economic effects of the earthquake and tsunami could expand further. On Tuesday, Japan's stock market
took its worst dive since the fall of 2008. Global companies, such as Toyota, have halted significant
portions of their output.
Already, collapsed nuclear plants are weakening Japan's energy supply, and power outages have hit
manufacturers. With infrastructure and factories destroyed, major automotive and technology companies
have frozen exports. As the world's economies still struggle to emerge from the recession, sectors that
have been major drivers of global growth now face massive stalls.

The full impact of the disaster, and the extent to which it could harm economies globally, cannot yet be
assessed, experts say. In economic terms, the tragedy might not have much effect on other countries, as
companies compensate for devastated facilities, say economists. But even once the crisis subsides and
Japan begins to rebuild, that country's economy could face major challenges.
Amid the massive devastation, experts see two emerging threats to the Japanese economy: the domestic
power supply could be compromised, and manufacturing companies could be unable to export products.
Japan's nuclear reactors provide about a third of the country's power, and a fraction of those reactors have
been incapacitated. On Monday, Tokyo Electric Power Company began to impose scheduled blackouts in
an attempt to avoid unpredictable outages on a larger scale, according to a release from the company. A
third reactor exploded Tuesday and a fourth caught fire.
Owing in part to this energy crisis, Japan's economic recovery will likely be delayed, according to a
Sunday report from Nomura Securities in Tokyo.
Experts disagreed on how long the economic setback would last, but acknowledged that the challenges to
the Japanese economy would be great.
"There's chaos," said Arthur Alexander, an economist at Georgetown who specializes in Japan. "That will
affect things in the short run."
Key elements of Japan's manufacturing have frozen. Toyota, Honda and Nissan automobile plants in
northern Japan have been closed. Nissan has said that nearly 2,300 Nissan and Infiniti vehicles awaiting
shipment were destroyed by the tsunami that followed the 9.0-magnitude earthquake, according to a
report from IHS Automotive.
Toyota has halted 45 percent of its global production, and plans to keep all its Japanese plants shuttered
through Wednesday, according to the report. Nissan has reported damage to six of its Japanese facilities.
Honda plans to keep several of its plants closed through March 20.
With shipping ports and roads destroyed, some companies are simply unable to export products. The
automotive industry, which economists have hailed as a source of global economic growth, now faces a
strain.
"Even if they could make the cars, they couldn't send them anywhere," Feldman said from Tokyo. "In a
certain sense, Japan is very tough -- construction standards really saved a lot of people -- but we do have
this distribution issue."
Devastation has also seized the technology sector. About 40 percent of the world's flash memory chips,
used in devices ranging from cameras to computers, are made in Japan. A fifth of the world's
semiconductors are made there. Already, Sony has shut down 10 factories and two research centers,
according to Bloomberg News. Toshiba has shut down five of its plants. Texas Instruments has closed two
plants and won't return to full production until July, according to Reuters.
The affected companies produce key components for computers, televisions, camcorders, DVD players
and iPads. Now, the high-tech industry, which experts have seen as a key source of economic growth,
contends with the prospect of a shortage.

"There will be individual companies in the U.S. that are not going to be able to get their supplies for
anywhere from weeks to months," Alexander, the Georgetown economist, said. "There certainly will be
suppliers who are either out of business or have lost their capabilities for the moment."
ANSWER THE FOLLOWING QUESTIONS:
Q3i) This is clearly a supply side shock explaining article. List and briefly explain all the points that can
affect the supply side of Japan, both in SR and in LR.
4 MARKS
Q3ii) Draw a diagram and explain what is happening to the price level and Real GDP level in Japan in the
Short Run.
4 MARKS
Q3iii) 6 months after the tsunami and earthquake, it has been observed that AD in the Japanese economy
has also fallen. Can you explain why has the AD fallen?
4 MARKS
Q3iv) Now, draw a diagram again incorporating the changes in AD and answer what is happening to price
level and Real GDP of Japan in the short run.
4 MARKS
Q3v) What do you think can happen to the Natural Real GDP and Price Level in the long run? Explain
briefly with a diagram.
4 MARKS