THE GLOBAL ECONOMICS GAME:  LESSON 2
Focus on Measuring the Economy's Performance

NOTE:  It is highly recommended that you read over this entire lesson before you begin.

Preliminary Discussion:  During the 1930's, many people were complaining about the poor performance of the economy.  How bad was it?  It was difficult to precisely answer this question, because we had not developed methods and procedures to formulate an accounting of the overall performance of the economy.

To correct this oversight, the United States Department of Commerce commissioned the National Bureau of Economic Research in Washington, D.C. to develop a system of National Income Accounting.  The team of experts which took on this task was led by Professor Simon Kuznets, who later won the Nobel Prize in Economics.  The broadest measure of economic activity which the team developed was the Gross Domestic Product, otherwise known simply as the GDP.  It measures the market value of goods and services produced (but not necessarily sold) over a given time period.

Labor force, employment, unemployment and consumer goods price data are now compiled by the Bureau of Labor Statistics.  The unemployment rate is calculated as the number of unemployed workers expressed as a percentage of the labor force.  The consumer price index (CPI) measures the cost of a market basket of goods and services that most urban consumers purchase most of the time. An increase in the cost of the market basket is indicative of inflation.

 The GDP, the unemployment rate, and the CPI are key economic indicators of the economy's performance.  These measurements are used by economic advisers to determine the appropriate economic policies.

The role of economic policy is to undertake steps to improve the country's overall economic performance and find that delicate, acceptable balance of conflicting goals.  Generally, the goals are to achieve full employment, price stability, and economic growth without excessive pollution.

In The Global Economics Game you are the chief economic adviser to the leaders of the country of your choice.  You are in charge of economic policy.  The objective is to implement timely and appropriate economic polices to improve the overall economic performance of your country.  Good luck and have fun!

Play The Global Economics Game to 100 points against two other countries that are computer-managed (i.e., advised by Professor N. D. Cator).  Note:  If you do not know how to play the game, then select "Tutorial" from the main menu first.  If you already know how to play, then select "New Game."  Complete the game and print the final score.
 
 

Figure 1 shows the playing field of the game.  Point A represents an optimal balance among conflicting short-run macroeconomic goals.  At Point A the economy is fully employed with a natural rate of unemployment and without too much inflation or too much pollution.  It represents a point on a country’s Production Possibilites Curve (PPC), but it doesn’t indicate the composition of goods and services in terms of guns and butter, capital and consumer, or private and public.
 

Answer the questions below using Figure 1 (above) as a reference.   For each question, enter the best single answer on your scantron card.

1. The nominal GDP measures the market value of goods and services produced ,but not necessarily sold, in terms of each year’s prices over a given period of time.  Therefore:
(a) If market prices fall, the quantity of goods and services produced goes down.
(b) The GDP also measures happiness:  The more stuff produced, the happier people are.
(c) If a good gets produced but not sold, then it doesn't get counted.
(d) If market prices rise, the nominal GDP goes up even if the same amount of stuff is being produced.
(e) The GDP per capita will necessarily go up when the GDP increases.

2. Real GDP is adjusted for inflation by using the equation: real GDP = (nominal GDP/price index) x 100, where the price index has a base year.  Therefore:
(a) The real GDP can only go up if more stuff is produced.
(b) The real GDP will go up automatically when prices go up.
(c) The real GDP will fall if prices go up.
(d) The real GDP can’t be higher than the nominal GDP.
(e) The nominal GDP can’t be higher than the real GDP.

3. When moving from Point B to Point A in Figure 1:
(a) the real GDP goes up, but the nominal GDP stays the same.
(b) the nominal GDP goes up, but the real GDP goes down.
(c) the real and nominal GDP’s both go up, but the nominal GDP goes up by more than the real GDP.
(d) the real GDP and the nominal GDP both go down.
(e) the real and nominal GDP’s both go up, but the real GDP goes up by more than the nominal GDP.

4. When moving from Point I to Point A in Figure 1:
(a) the nominal and real GDP both go down.
(b) the nominal GDP goes up but the real GDP goes down when adjusted for inflation.
(c) the real GDP goes up by more that the nominal GDP goes up.
(d) the real GDP goes up, but the nominal GDP stays the same.
(e) the nominal GDP goes up, but the rate of growth in real GDP stays the same.

5. Underground economic activity is both legal and illegal.  In either case, it goes unreported.  Therefore, if an economy has underground activity:
(a) The reported GDP overstates the level of economic activity.
(b) It's impossible to calculate the reported GDP.
(c) The reported GDP understates the level of economic activity.
(d) Most people are not reporting their economic activity.
(e) The reported GDP is meaningless.

6. The unemployment rate measures the number of unemployed expressed as a percentage of the labor force.  Therefore:
(a) If a person quits one job to look for another job, then both the labor force and the unemployment rate go up.
(b) If the number of unemployed goes up and the labor force goes down, then the unemployment rate goes up.
(c) The unemployment rate goes up whenever someone retires from the labor force.
(d) Everytime a child is born the labor force automatically increases 16 year later.
(e) All of the above statements are true.

7. If an economy moves from Point D to Point H in Figure 1:
(a) the real GDP remains the same, while cyclical and structural unemployment both go up.
(b) the real GDP goes down,  cyclical unemployment goes down, and structural unemployment goes up.
(c) the nominal and real GDP’s both go up, and cyclical and structural unemployment both go down.
(d) the real GDP goes up, cyclical unemployment goes up, and structural unemploment goes down.
(e) the real GDP goes up, cyclical unempoyment goes down, and structural unemployment goes up.

8. The consumer price index (CPI) measures the cost of a typical market basket of goods and services which urban consumers purchase most of the time.  Therefore:
(a) The CPI precisely measures the cost-of-living for everyone.
(b) The CPI does not measure the prices of goods and services which are purchased by consumers who earned their income in the underground economy.
(c) The CPI is more accurate and relevant the longer we keep track of it.
(d) If urban consumers change the composition of their market basket, the CPI necessarily understates changes in the cost-of-living.
(e) The CPI makes no attempt to measure the cost of all consumer goods and services, because the cost of collecting and processing the data would exceed the benefit.

9. Which of the following statements is true?
(a) Moving diagonally toward Hyperinflation (from Point A to Point F in Figure 1), the CPI, the nominal GDP, and the real GDP would all increase.
(b) Moving diagonally toward Stagflation (from Point A to Point D in Figure 1), the CPI would increase,  the real GDP would increase, and the cyclical unemployment rate would also increase.
(c) Moving diagonally toward Depression (from Point A to Point B in Figure 1), the CPI would decrease, the nominal GDP would not change, and the labor force would decrease.
(d) Moving diagonally toward Cybernation (from Point A to Point H in Figure 1), the CPI would decrease, the real GDP would fall, and structural unemployment would decrease.
(e) Moving straight to the left (from Point A to Point C in Figure 1), the CPI, the unemployment rate, and the real GDP would all decrease.

10. The rate of growth in real GDP is the same at Point E as it is at point A in Figure 1.  But Point A is preferred to Point E, because:
(a) Point E has more pollution.
(b) the purchasing power of people’s savings is being eroded by inflation at Point E.
(c) there is higher cyclical unemployment at Point E.
(d) the nominal GDP is higher at Point E.
(e) there is higher structural unemployment at Point E.

End of Lesson 2

You will receive _____  possible points for this exercise.

Instructor’s Option:  You will receive ____additional points if you win the game, or ____ extra points if you place second).
 

The Global Economics Game   (C) 2004  Ronald W. Schuelke   All Rights Rights Reserved