1
Spring, 2016
ECON 611
Quiz #1
Fill the blanks or choose the correct word or write proper equations. Each blank is worth 2 points unless specified
otherwise.
[1] (a) The GDP stands for the (Gross Domestic Product) and it is the (market) value of all (final) goods and
services produced within a country during a given period of time.
(b) There are three approaches to measure the GDP: (1) Product approach, (2) Expenditure approach, and (3)
(Income) approach. In the product approach, let Pit and Qit be the price and quantity of final goods and service item
i produced in period t, i=1,2,...,n. The nominal GDP in period t is computed by
𝐺𝐷𝑃𝑡 = ( ∑𝑛𝑖=1 𝑃𝑖𝑡 𝑄𝑖𝑡 )
[2] The growth of nominal GDP does not necessarily track changes in living standards, because it is affected by
both real qualities and their market prices. To remove the effect of price changes, we compute the real GDP. There
are two methods to do this: the fixed weight (or constant dollar) method and the chain weighted (or chained dollar)
method. Let Pit and Qit be the price and quantity of final goods and service item i produced in period t, i=1,2,...,n.
Let the base year be t=0. Let the nominal GDP and the real GDP in period t be denoted by NGDPt and RGDPt ,
respectively.
(a) The fixed weight method computes the values of product produced in period t using the (base year) prices and
sum them up. It can be written as
𝑅𝐺𝐷𝑃𝑡 = (∑𝑛𝑖=1 𝑃𝑖0 𝑄𝑖𝑡 )
(b) A major problem with the fixed weight real GDP is that the growth rates of real GDP can change substantially
when the choice of the (base year) changes. This is more serious when the price of a good (increases, decreases)
significantly and its quantity increases significantly. Therefore, the entire history of real GDP growth changes each
time the base year is switched.
[3] Given the real GDP (RGDPt-1) in period t-1, you wish to compute the real GDP in period t using the chain
weighted method. Explain the procedure step by step
Step 1: Compute the dollar values of ( Qit) and (Qit-1) using prices (Pit-1), sum them up, and compute the growth rate
from t-1 to t, which can be written as (write the mathematical formula)
2
𝑅𝑡|𝑡−1 =
𝑛
∑𝑛
𝑖=1 𝑃𝑖𝑡−1 𝑄𝑖𝑡 −∑𝑖=1 𝑃𝑖𝑡−1 𝑄𝑖𝑡−1
∑𝑛
𝑖=1 𝑃𝑖𝑡−1 𝑄𝑖𝑡−1
∑𝑛 𝑃𝑖𝑡−1 𝑄𝑖𝑡
= ∑𝑛𝑖=1𝑃
𝑖𝑡−1 𝑄𝑖𝑡−1
𝑖=1
−1
Step 2: Compute the dollar values of (Qit) and (Qit-1) using prices (Pit), sum them up, and compute the growth rate
from t-1 to t, which can be written as (write the mathematical formula)
𝑅𝑡|𝑡 =
𝑛
∑𝑛
𝑖=1 𝑃𝑖𝑡 𝑄𝑖𝑡 −∑𝑖=1 𝑃𝑖𝑡 𝑄𝑖𝑡−1
∑𝑛 𝑃𝑖𝑡 𝑄𝑖𝑡
= ∑𝑛𝑖=1𝑃
∑𝑛
𝑖=1 𝑃𝑖𝑡 𝑄𝑖𝑡−1
𝑖=1 𝑖𝑡 𝑄𝑖𝑡−1
−1
Step 3: Compute the (arithmetic) mean or the (geometric mean) of these two growth rates as the growth rate of
chained-dollar values. These means can be written as (write the mathematical formulae of the two means)
1
∑𝑛 𝑃𝑖𝑡−1 𝑄𝑖𝑡
𝑅𝑡,𝑐ℎ𝑎𝑖𝑛𝑒𝑑 = 2 (∑𝑛𝑖=1𝑃
𝑖=1
𝑖𝑡−1 𝑄𝑖𝑡−1
∑𝑛 𝑃𝑖𝑡−1 𝑄𝑖𝑡
𝑅𝑡,𝑐ℎ𝑎𝑖𝑛𝑒𝑑 = √∑𝑛𝑖=1𝑃
∑𝑛 𝑃𝑖𝑡 𝑄𝑖𝑡
𝑖=1 𝑖𝑡−1 𝑄𝑖𝑡−1
+ ∑𝑛𝑖=1𝑃
𝑖=1
𝑖𝑡 𝑄𝑖𝑡−1
∑𝑛 𝑃𝑖𝑡 𝑄𝑖𝑡
× ∑𝑛𝑖=1𝑃
𝑖=1 𝑖𝑡 𝑄𝑖𝑡−1
) − 1 or
−1
Step 4: Compute the real GDP in period t given the real GDP in period t-1 by (write the mathematical formula)
𝑅𝐺𝐷𝑃𝑡 = (1 + 𝑅𝑡,𝑐ℎ𝑎𝑖𝑛𝑒𝑑 )𝑅𝐷𝐺𝑃𝑡−1
[4] Quiz 1 Excel assignment is posted at the class website. Complete it and return it to the TA (dongnizhu@tamu.edu)
as an attached file to an email by 5 p.m. on Friday.
You may work on it alone, or work with another student and submit one file with two names. One file cannot have
more than two names.