MACROECONOMICS+ACHIEVE 1-TERM AC (LL)
MACROECONOMICS+ACHIEVE 1-TERM AC (LL)
10th Edition
ISBN: 9781319467203
Author: Mankiw
Publisher: MAC HIGHER
Question
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Chapter 2, Problem 7PA

(a)

To determine

Calculation of nominal GDP, real GDP, GDP deflator, and CPI.

(a)

Expert Solution
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Explanation of Solution

Given information:

Price of hot dog in 2010 is $2.

Quantity of hot dog in 2010 is 200 units.

Price of hamburgers in 2010 is $3.

Quantity of hamburgers in 2010 is 200 units.

Price of hot dog in 2018 is $4.

Quantity of hot dog in 2010 is 250 units.

Price of hamburgers in 2010 is $4.

Quantity of hamburgers in 2010 is 500 units.

Calculation:

The general formula for calculating nominal GDP is given as follows:

Nominal GDP=((PriceGood X×QuantityGood X)+(PriceGood Y×QuantityGood Y)) (1)

Substitute the respective values in Equation (1) to calculate the nominal GDP in 2010.

Nominal GDP2010=(2×200)+(3×200)=400+600=1,000

Nominal GDP in 2010 is $1,000.

Using the same Equation (1), the calculation of nominal GDP in 2018 is shown below:

Nominal GDP2018=(4×250)+(4×500)=1,000+2,000=3,000

Nominal GDP in 2018 is $3,000.

The real GDP is calculated on the basis of base year price. Here, the base year is 2010. The formula for calculating real GDP is shown as follows:

Real GDP=((Base year priceGood X×QuantityGood X)+(Base year priceGood Y×QuantityGood Y)) (2)

Substitute the respective values in Equation (2) to calculate the real GDP in 2010.

Real GDP2010=(2×200)+(3×200)=100+600=1,000

Real GDP in 2010 is $1,000.

Using the same Equation (2), the calculation of real GDP in 2018 is shown below:

Real GDP2018=(2×250)+(3×500)=500+1,500=2,000

Real GDP in 2018 is $2000.

The general formula for calculating GDP deflator is given below:

GDP deflator=(Nominal GDPReal GDP) (3)

Substitute the respective values in Equation (3) to calculate the GDP deflator in 2010.

GDP deflator2010=(1,0001,000)=1

GDP deflator in 2010 is 1.

Using the same Equation (3), the calculation of GDP deflator in 2018 is shown below:

GDP deflator2018=(3,0002,000)=1.5

GDP deflator in 2018 is 1.5.

The CPI in 2010 is equal to 1, thus, the calculation of CPI (Consumer Price Index) in 2018 is shown below:

CPI2018=((PriceHot dogs2018×QuantityHot dogs2010)+(PriceBurgers2018×QuantityBurgers2010)(PriceHot dogs2010×QuantityHot dogs2010)+((PriceBurgers2010×QuantityBurgers2010)))=((4×200)+(4×200)(2×200)+(3×200))=(1,6001,000)=1.6

CPI (Consumer Price Index) in 2018 is 1.6.

Economics Concept Introduction

Nominal GDP: Nominal GDP is the market value of all final goods and services produced in an economy during an accounting year, measured in current prices.

Real GDP: Real GDP refers to the market value of all final goods and services produced in an economy during an accounting year, measured in constant prices.

(b)

To determine

Compare the answers by the Laspeyres and Paasche price indexes.

(b)

Expert Solution
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Explanation of Solution

A GDP (gross domestic product) deflator is a Paasche index, the reason is, it has changing basket of goods. On the other hand, the consumer price index is a Laspeyres index, because, it has fixed basket of goods.

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