Economics 11
Spring 2005
Due Monday Feb 28, 2005 Homework 5
Chapter 10 Problems and Applications
1, 5, 6, 7
1.a. A family
buying a new refrigerator would increase Consumption spending. Everything new that people buy is part of
consumption, except for housing.
b. Aunt Jane’s purchase of a new house would increase residential
fixed investment, which is a type of investment.
c. When Ford sells you a Taurus from its inventory, there is a
decrease in the inventory level, which is a decline in investment. But there is also an increase in consumption
spending. When the car entered Ford’s
inventory, it was counted as an investment good, so we don’t want to count it
twice.
d. Buying a pizza is a type of consumption spending.
e. Repaving a highway is a type of government spending. The government is purchasing something.
f. Buying a bottle of French wine:
That is consumption spending. But
GDP measures the dollar value of production in an economy. The wine was produced outside the country, so
it is also counted as an import, which is subtracted from GDP.
g. When Honda expands its factory, there is an increase in investment
spending. It does not matter that Honda
is a Japanese firm. If Honda expanded in
5.a.
|
|
P Milk |
Q milk |
P Honey |
Q Honey |
|
2001 |
$1 |
100 |
$2 |
50 |
|
2002 |
$1 |
200 |
$2 |
100 |
|
2003 |
$2 |
200 |
$4 |
100 |
Nominal GDP is
just the price times the quantity of each good added together for each year. Real GDP is the quantity in each year times
the price in the base year (2001). The
GDP deflator is the nominal GDP divided by real GDP for each year x 100:
|
|
Nominal |
Real |
Deflator |
|
2001 |
$200 |
$200 |
100 |
|
2002 |
$400 |
$400 |
100 |
|
2003 |
$800 |
$400 |
200 |
b.
|
|
Percent Change in |
||
|
|
Nominal |
Real |
Deflator |
|
2001 |
|
|
|
|
2002 |
100% |
100% |
0% |
|
2003 |
100% |
0% |
100% |
Prices did not
change from 2001 to 2002, therefore the GDP deflator
had a 0% increase. From 2002 to 2003 the
quantities did not change, so real GDP did not change.
c. Economic well-being rose more in 2002.
It doubled since there is twice as much goods and services available to
people. In 2003, the only thing that
happened was prices rose. There was not
any more goods or services (or milk and honey) for people so they were not
better off.
6.a.
The growth rate of nominal GDP from 1999 to 2000 was (9873-9269)/9269 =
6.5%
b. The growth rate of the GDP deflator was (118-113)/113 = 4.4%
c. Real GDP in 1999 in 1996 prices (note that 1996 is the base year)
is 9269/113 x 100 = $8,203
d. Real GDP in 2000 in 1996 prices is 9873/118 x 100 = $8,367
e. The growth rate in real GDP between 1999 and 2000 was
(8367-8203)/8203 = 2.0%
f. Nominal growth of GDP was 6.5%, greater than real. That’s because part of the increase in
nominal GDP came from price increases.
7. People’s incomes rise when prices rise. Real GDP growth ignores this because people’s
incomes rise but so does the cost of purchasing
GDP. So they’re not any better off in
the aggregate. So real
GDP is the preferred metric.