2.5: Exercises for Chapter 2

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EXERCISE 2.1

An examination of a country's recent international trade flows yields the data in the table below.

Year	National Income ($b)	Imports ($b)
2011	1,500	550
2012	1,575	573
2013	1,701	610
2014	1,531	560
2015	1,638	591

Based on an examination of these data do you think the national income and imports are not related, positively related, or negatively related?
Plot each pair of observations in a two-dimensional line diagram to illustrate your view of the import/income relationship. Measure income on the horizontal axis and imports on the vertical axis. This can be done using graph paper or a spreadsheet-cum-graphics software.

EXERCISE 2.2

The average price of a medium coffee at Wakeup Coffee Shop in each of the past ten years is given in the table below.

2005	2006	2007	2008	2009	2010	2011	2012	2013	2014
$1.05	$1.10	$1.14	$1.20	$1.25	$1.25	$1.33	$1.35	$1.45	$1.49

Construct an annual 'coffee price index' for this time period using 2005 as the base year. [Hint: follow the procedure detailed in the chapter – divide each yearly price by the base year price.]
Based on your price index, what was the percentage change in the price of a medium coffee from 2005 to 2012?
Based on your index, what was the average annual percentage change in the price of coffee from 2005 to 2010?
Assuming the inflation rate in this economy was 2% every year, what was the real change in the price of coffee between 2007 and 2008; and between 2009 and 2010?

EXERCISE 2.3

The following table shows hypothetical consumption spending by households and income of households in billions of dollars.

Year	Income	Consumption
2006	476	434
2007	482	447
2008	495	454
2009	505	471
2010	525	489
2011	539	509
2012	550	530
2013	567	548

Plot the scatter diagram with consumption on the vertical axis and income on the horizontal axis.
Fit a line through these points.
Does the line indicate that these two variables are related to each other?
How would you describe the causal relationship between income and consumption?

EXERCISE 2.4

Using the data from Exercise 2.3, compute the percentage change in consumption and the percentage change in income for each pair of adjoining years between 2006 and 2013.

EXERCISE 2.5

You are told that the relationship between two variables, X and Y, has the form Y=10+2X. By trying different values for X you can obtain the corresponding predicted value for Y (e.g., if X=3, then ). For values of X between 0 and 12, compute the matching value of Y and plot the scatter diagram.

EXERCISE 2.6

For the data below, plot a scatter diagram with variable Y on the vertical axis and variable X on the horizontal axis.

Y	40	33	29	56	81	19	20
X	5	7	9	3	1	11	10

Is the relationship between the variables positive or negative?
Do you think that a linear or non-linear line better describes the relationship?