GDP deflator and wage rate?

Question

Production

Labour Real GDP

1 38

2 54

3 68

4 80

5 90

6 98

7 104

8 108

Labour Market

Real wage rate Q of labour demanded Q of labour supplied

3 8 4

5 7 5

7 6 6

9 5 7

11 4 8

13 3 9

15 2 10

17 1 11

From the above figure, we are able to know that real wage is 6, and potential GDP is 98.

My question is, when GDP deflatior is 120, what the nominal wage rate?

and If the GDP deflator rises to 130, what happens to the real wage rate? Will employment, and real GDP rise or fall?

Answer 1

____________

L .. RGDP .MRPL

____________

1 ..... 38 .... 38

2 ..... 54 .... 16

3 ..... 69 .... 15

4 ..... 80 .... 11

5 ..... 90 .... 10

6 ..... 98 ..... 8

7 .... 104 ..... 6

8 .... 108 ..... 4

____________

_____________

W/P .Qd .. Qs

_____________

3 ..... 8 ..... 4

5 ..... 7 ..... 5

7 ..... 6 ..... 6

9 ..... 5 ..... 7

11 .... 4 ..... 8

13 .... 3 ..... 9

15 .... 2 .... 10

17 .... 1 .... 11

_____________

RGDP - real GDP

MRPL - marginal revenue product of labor

L - quantity of labor

Qs - quantity of labor supplied

Qd- quantity of labor demanded

P - price level

W - nominal wage

W/P - real wage

First thing to note is Qs=Qd=6 (always),

and Real wage = constant = W/P= 7

Thus RGDP = constant = 98

Deflator=120 → P=1.2 → W/1.2=7 → W=7*1.2= 8.4

Deflator=130 → P=1.3 → W/1.3=7 → W=7*1.3= 9.1

It all true for discrete statical economy and rational expectations.

Answer 2

You're doing the Principle of Macroeconomics at Adelaide Uni arn't you? If you're having trouble with something, like this question, email John.