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Example - Income and Spending

The document provides information about GDP and its components for various scenarios: 1) Debbie's dinner purchase increases consumption and GDP by $200. Sarah's laptop purchase increases investment but does not change GDP. Jane's computer purchase does not change current GDP or investment. 2) It provides calculations of nominal and real GDP for different years using price and quantity data for pizza and rice. 3) It defines nominal GDP, real GDP, and GDP deflator and provides calculations for an example. 4) It provides a calculation example for nominal GDP, real GDP, and GDP deflator using price and quantity data.

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216 views10 pages

Example - Income and Spending

The document provides information about GDP and its components for various scenarios: 1) Debbie's dinner purchase increases consumption and GDP by $200. Sarah's laptop purchase increases investment but does not change GDP. Jane's computer purchase does not change current GDP or investment. 2) It provides calculations of nominal and real GDP for different years using price and quantity data for pizza and rice. 3) It defines nominal GDP, real GDP, and GDP deflator and provides calculations for an example. 4) It provides a calculation example for nominal GDP, real GDP, and GDP deflator using price and quantity data.

Uploaded by

malingaperera
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Q1

In each of the following cases, determine how much GDP and each of its components is affected (if at all). A. Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston. B. Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. C. Jane spends $1200 on a computer to use in her editing business. She got last years model on sale for a great price from a local manufacturer. D. General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them.

A. Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston. Consumption and GDP rise by $200.
B.

Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. Investment rises by $1800, net exports fall by $1800, GDP is unchanged.

c. Jane spends $1200 on a computer to use in her editing business. She got last years model on sale for a great price from a local manufacturer. Current GDP and investment do not change, because the computer was built last year.
D.

General Motors builds $500 million worth of cars, but consumers only buy $470 million of them. Consumption rises by $470 million, inventory investment rises by $30 million, and GDP rises by $500 million.

Q 2(Assume we are producing only


two goods)
Pizza year 2002 2003 2004 P $10 $11 $12 Q 400 500 600 P $2.00 $2.50 $3.00 Rice Q 1000 1100 1200
% Change:

Compute nominal GDP in each year: 2002: 2003: 2004: $10 x 400 + $2 x 1000 $11 x 500 + $2.50 x 1100 $12 x 600 + $3 x 1200 = $6,000 = $8,250 = $10,800

37.5% 30.9%

Note: 30.9% = (10,800 / 8,250) 1 * 100

year 2002 2003 2004

Nominal GDP $6000 $8250 $10,800

Real GDP $6000 $7200 $8400

In each year, Nominal GDP is measured using the current prices. Real GDP is measured using constant prices from the base year (2002 in this example).

Q3
year 2002 2003 2004 2002: 2003: 2004: Nominal GDP $6000 $8250 $10,800 Real GDP $6000 $7200 $8400 100.0 114.6 128.6 GDP Deflator Inflation Rate

14.6% 12.2%
(128.6/114.6) -1 * 100 = 12.2%

100 x (6000/6000) = 100 x (8250/7200) = 100 x (10,800/8400) =

Q4
2004 (base yr) P good A good B $30 $100 Q 900 192 P 2005 Q P $36 $100 2006 Q 1050 205

$31 1,000 $102 200

Use the above data to solve these problems:


A. Compute nominal GDP in 2004.
B. Compute real GDP in 2005. C. Compute the GDP deflator in 2006.

A. Compute nominal GDP in 2004.


$30 x 900 + $100 x 192 = $46,200 B. Compute real GDP in 2005. $30 x 1000 + $100 x 200 = $50,000

C. Compute the GDP deflator in 2006. Nom GDP = $36 x 1050 + $100 x 205 = $58,300 Real GDP = $30 x 1050 + $100 x 205 = $52,000 GDP deflator = 100 x (Nom GDP)/(Real GDP) = 100 x ($58,300)/($52,000) = 112.1

Atoll K is small island nation. Its population total is 400, and it has 100 wage earners who earn an average of $50 per year. Each wage earner spends $40 per year buying local goods and services and $3.00 buying imports. The island exports a total of $800 worth of goods. The Government tax rate is 10% and all government money is spent on building infrastructure and supporting schools. There is only one industry (uranium mining) on the island and it employs every wage earner. The industry spends $600 each year on new mining equipment. What is the GDP?

Y = C + I + E + G, where E = X - M C = 100 x ($40+3) = $4300 Total Consumer Spending I = 600 Total spent on Investment X = 800 Total received from Exports M = 100 x $3.0 = -300 Total spent on Imports G = .1 x (100 x $50) = 500 10% of total income for workers $5900 Total = GDP

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