1.)Explain why an economy’s income must equal its expenditure and those should equal the level of production.
Gross domestic product measures three things at once: (1) the total income of everyone in the economy and (2) the total expenditure on the economy’s output of final goods and services. It can measure both of these things at once because all expenditure in the economy ends up as someone’s income. These will both be equal to (3) the total production in the economy.
2.)A lumberjack sells wood to a furnituremaker for $2. The furnituremaker uses the wood to make a dresser, which is sold for $3. What is the total contribution of these transactions to GDP?
Only the amount of the final good. $3
3.) List the four components to GDP. Give an example of each.
The four components of expenditure are: (1) consumption; (2) investment; (3) government purchases; and (4) net exports. I am sure you can find an example of each.
4.) Why do economists use real GDP rather than nominal GDP to evaluate economic well-being?
Economists use real GDP rather than nominal GDP to gauge economic well-being because real GDP is not affected by changes in prices, so it reflects only changes in the amounts being produced. You cannot determine if a rise in nominal GDP has been caused by increased production or higher prices.
5.)What components of GDP (if any) would each of the following transactions affect? Explain.
a.Your father buys a new couch from a domestic manufacturer.
b.Aunt Mae buys a new house from a local builder.
c.The Smiths buy an old house from the Jones family.
d.You pay a barber for a haircut.
e.Ford sells a Mustang from its inventory to you.
f.Ford manufacturers a Focus and sells it to Avis, the car rental company.
g.Moorhead hires workers to repave Main Street.
h.The federal government sends your grandmother a Social Security check.
i.Your parents buy a bottle of French wine.
j.Honda expands its factory in Ohio.
a. Consumption increases because a couch is a good purchased by a household.
b. Investment increases because a house is an investment good.
c. No change because this is not current production.
d. Consumption increases because a haircut is a service purchased by a household.
e. Consumption increases because a car is a good purchased by a household, but investment decreases because the car in Ford’s inventory had been counted as an investment good until it was sold.
f. Investment will increase because Avis uses the good within their business model.
g. Government purchases increase because the government spent money to provide a good to the public.
h. No change because this is a transfer payment.
i. Consumption will increase because the wine is a good, but imports will also increase because the wine is French.
j. Investment increases because new structures and equipment were built.
6.)Fill in the blanks:
Year | Real GDP (in 2000 dollars) | Nominal GDP (in current dollars) | GDP Deflator (based year 2000) |
1970 | 3,000 | 1,200 | 40 |
1980 | 5,000 | 3,000 | 60 |
1990 | 6,000 | 6,000 | 100 |
2000 | 8,000 | ||
2010 | 7,500 | 15,000 | 200 |
2020 | 10,000 | 30,000 | 300 |
2030 | 20,000 | 50,000 | 250 |
7.)The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded.
With transfer payments, nothing is produced, so there is no contribution to GDP.
8.) Below are some data from the land of milk and honey:
Year | Price of Milk | Quantity of Milk | Price of Honey | Quantity of Honey |
2016 | $1 | 100 quarts | $2 | 50 quarts |
2017 | $1 | 200 quarts | $2 | 100 quarts |
2018 | $2 | 200 quarts | $4 | 100 quarts |
a.Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2016 as the base year.
b.Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2017 and 2018 from the preceding year. For each year, identify the variable that does not change. Explain why the variable that does not change. Explain why your answer makes sense.
c.Did economic well-being increase more in 2017 or 2018? Explain.
a.Nominal GDP for each year is found in the following table:
Year | Nominal GDP |
1 | P1Q1 |
2 | P2Q2 |
3 | P3Q3 |
b. Real GDP for each year is found in the following table:
Year | Real GDP |
1 | P1Q1 |
2 | P1Q2 |
3 | P1Q3 |
c. The GDP deflator for each year is found in the following table:
Year | GDP deflator |
1 | 100 |
2 | (P2/P1)100 |
3 | (P3/P1)100 |
d. Real GDP growth from Year 2 to Year 3 equal to [(Q3 – Q2)/Q2] × 100 percent.
e. The inflation rate as measured by the GDP deflator is [(P3 – P2)/P2] × 100 percent.
5. a.Calculating nominal GDP:
2008: ($1 per qt. of milk ´ 100 qts. milk) + ($2 per qt. of honey ´ 50 qts. honey) = $200
2009: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400
2010: ($2 per qt. of milk ´ 200 qts. milk) + ($4 per qt. of honey ´ 100 qts. honey) = $800
Calculating real GDP (base year 2008):
2008: ($1 per qt. of milk ´ 100 qts. milk) + ($2 per qt. of honey ´ 50 qts. honey) = $200
2009: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400
2010: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400
Calculating the GDP deflator:
2008: ($200/$200)´ 100 = 100
2009: ($400/$400)´ 100 = 100
2010: ($800/$400)´ 100 = 200
b. Calculating the percentage change in nominal GDP:
Percentage change in nominal GDP in 2009 = [($400 − $200)/$200] ´ 100 = 100%.
Percentage change in nominal GDP in 2010 = [($800 − $400)/$400] ´ 100 = 100%.
Calculating the percentage change in real GDP:
Percentage change in real GDP in 2009 = [($400 − $200)/$200] ´ 100 = 100%.
Percentage change in real GDP in 2010 = [($400 − $400)/$400] ´ 100 = 0%.
Calculating the percentage change in GDP deflator:
Percentage change in the GDP deflator in 2009 = [(100 − 100)/100] ´ 100 = 0%.
Percentage change in the GDP deflator in 2010 = [(200 − 100)/100] ´ 100 = 100%.
Prices did not change from 2008 to 2009. Thus, the percentage change in the GDP deflator is zero. Likewise, output levels did not change from 2009 to 2010. This means that the percentage change in real GDP is zero.
c. Economic well-being rose more in 2008 than in 2009, since real GDP rose in 2009 but not in 2010. In 2009, real GDP rose but prices did not. In 2010, real GDP did not rise but prices did.
9.) Considering the following data on U.S. GDP:
Year | Nominal GDP (in billions of dollars) | GDP Deflator (base year 2009) |
2014 | 17,419 | 108.3 |
1994 | 7,309 | 73.8 |
a.What was the growth rate of nominal GDP between 1994 and 2014? (Hint: The growth rate of a variableXoverN-year period is calculated as 100 *[(Xfinal/Xinitial)1/N-1].)
b.What was the growth rate of the GDP deflator between 1994 and 2014?
c.What was real GDP in 1994 measured in 2009 prices?
d.What was real GDP in 2014 measured in 2009 prices?
e.What was the growth rate of real GDP between 1994 and 2014?
f.Was the growth rate of nominal GDP higher or lower than the growth rate of real GDP? Explain.
I know about the hint, but now that I have read it closely I would rather you did a simple percent change. I have provided the percent change as the answer below. I will of course count with the hint which is a compounded annualized growth rate.
a. The growth rate of nominal GDP is ($17,419 − $7,309)/$7,309 ´ 100%
b. The growth rate of the deflator is (108.3 − 73.8)/73.8´ 100%
c. Real GDP in 1994 (in 2009 dollars) is $7,309/(73.8/100)
d. Real GDP in 2014 (in 2009 dollars) is $/(108.3/100)
10.) Revised estimates of U.S. GDP are usually released by the government near the end of each month. Find a newspaper article that reports on the most recent release, or read the news release yourself athttp://www.bea.gov, the website of the U.S. Bureau of Economic Analysis. Discuss the recentchanges in real and nominal GDP and in components of GDP.
