Ch 22 Study Guide
Practice Problem #1
Year 1
Year 2
Year 3
GDP
$4532
$4804
???
Consumption
??? $3127
$3320
$3544
Investment
$589
$629
$673
Govt. Purchase
$861
??? $913
$977
NX
$-45
$-58
$-54
$5140
• 1b. Largest expenditure component of GDP?
• Consumption
• C. does investment include the purchase of stocks
and bonds? Why?
• No, they are financial transactions. There is no
production of goods or services
• D. Do government purchases include government
spending on unemployment checks? Why?
• No – considered transfer payments. No
production or exchange of goods/services
• E. What does it mean when NX are negative?
• The country imports more goods than it exports
• NX = X-M ….so if –NX , then M>X
Practice Problem #2
Year
2000
2001
2002
Production of X
20
20
20
a. Nominal GDP (P x Q)
2000 $100
2001 $200
2002 $400
Price X
$5
$10
$20
b. Real GDP (current year Q x base yr P)
2000 $100
2001 $100
2002 $100
Economic Growth?
•
•
•
•
•
•
•
•
What does it tell us when NGDP increases?
Could be increase in production
Could be increase in price
Could be combination of production and price
What does it tell us when RGDP increases?
…b/c P is held constant to base year
….increase is due to increase in Q
….= ECONOMIC GROWTH
Year
2000
2001
2002
Production of X
20
20
20
Nominal GDP (P x Q)
2000 $100
2001 $200
2002 $400
Price X
$5
$10
$20
Real GDP (current year Q x base yr P)
2000 $100
2001 $100
2002 $100
Conclusions??? Economic growth? Price Levels?
There was no economic growth.
There was only an increase in price level
#3
Year
2000
2001
P soda Q soda P jeans Q jeans
$1
200
$10
50
$1
220
$11
50
NGDP
a. $700
c. $770
RGDP
b. $700
d. $720
Mistake – avoid looking at each individual good – remember this is a
model for the entire economy
ex of wrong answer: conclude the economy grew for soda but
not for jeans……this does not make sense
e. Value of GDP Deflator in 2000?
NGDP / RGDP x 100 : always 100 in base year
f. Value of GDP Deflator in 2001?
770/720 x 100 = 107
GDP = $$$$$$
Deflator is NOT $$ nor %% …IS index based on 100
• g. from 2000-2001: prices rose approximately what
percentage?
• Compare GDP deflators – measure the change in price level
• 2nd -1st / 1st
• 107-100/100 = 7%
• h. was the increase in NGDP from 2000-01 mostly due to an
increase in real output or prices?
• NGDP rose from $700 to $770 = 10% increase
• Increase in real output = RGDP
• 2000=$700 2001 = $720 2.85% (3%)
• Increase in prices = Deflator = 7%
• Conclude – 10%increase in NGDP was MOSTLY due prices (7%)
vs. output (3%)
Evaluate
• Was there economic growth?
• Yes …
• RGDP…. Or
– Real output…. Or
• ……the economy …….
• Grew at a 3% rate
• The growth rate of the economy was 3%
….”normal growth” = 3% per year – long term trend since
the 1950’s
………but………
• Price level or inflation increased by 7%
• …..not good to have inflation outpace
production
• “normal” inflation is 1%-2%
#4 Complete Table
Year
1.
2.
3.
NGDP
-----$100
$120
$150
RGDP
$100
---- $100
$125
GDP Deflator
100
120
---- 120
Year 1 Math: Nom/Real x 100 = Deflator…$x / $100 x 100 = 100 = NGDP = $100
Year 2 Math:
$120 /$x x100 = 120
RGDP = 100
Year 3 Math: $150/$125 x 100 = 120
a. What is base year? How can you tell ?
If Nom and Real are always same in base year, then GDP Deflator will
always be 100 in the base year…..so year 1 is base year
Year
NGDP
RGDP
GDP Deflator
1.
-----$100
$100
100
2.
$120
---- $100
120
3.
$150
$125
---- 120
b. From year 1 to year 2, did real output rise or did prices rise?
Explain
The change from year 1 to 2 was due to price rising.
The Nom and Deflator rose 20% but Real did not change at all
..indicating no change in output(RGDP measures growth in
output) …so prices rose by 20%
c. From year 2 to year 3, did real output rise or did prices rise?
Explain
The change from year 2 to 3 was due to output rising .
The Nom and Real both increased by 25% but the Deflator did not
change….indicating no change in price….so output rose by 25%
Year
1.
2.
3.
NGDP
-----$100
$120
$150
RGDP
$100
----$100
$125
GDP Deflator
100
120
---- 120
BONUS: Evaluate the growth of this economy from year 1 to year 3
The economy grew by 25% (based on RGDP) ….
…but prices also grew by 20% (based on the deflator)