ECM2642 Practice questions Week 1
Introduction & revision of basic macroeconomic concepts
1. Read the article below and answer the following questions.
Investopedia stock analysis: What does it signify if there is a large discrepancy between a
nation's real and nominal GDP? (2015). . Chatham: Newstex. Retrieved from
https://www.proquest.com/blogs-podcasts-websites/investopedia-stock-analysis-whatdoes-signify-if/docview/1675041680/se-2?accountid=12528
A large discrepancy between a nation's real and nominal GDP signifies inflationary or
deflationary forces in the economy. Typically, inflation makes nominal GDP appear higher
than real GDP.
Nominal GDP is an economic indicator that measures economic activity in a given year
including changes in price levels that may be due to inflation or deflation. Real GDP strips out
the effects of changes in prices due to inflation or deflation by measuring all GDPs based on
prices in a fixed year.
Gross domestic product is calculated on a nominal basis based on that year's currencies'
purchasing power. Given the effect of currencies' purchasing power to lose value over time
due to inflation, a GDP deflator is applied that strips out the effects of inflation on nominal
GDP. This figure is called real GDP, and it allows comparison on a year-to-year basis.
Without this deflator, it would not be possible to compare GDP on a year-by-year basis
accurately and know whether the changes were due to inflation or increased economic
activity. A stagnant economy with high inflation may witness strong nominal gains, but real
gains would reflect a more accurate picture.
For example, an economy with 10% inflation and zero economic growth would have nominal
GDP growth of 10%. Changes in price levels would deceivingly make it look like economic
activity has increased. By taking out the impact of inflation and recalculating prices based on
a base year, it would become clear that real GDP growth is zero.
For countries with significant inflation, calculating real GDP from nominal GDP can be a
politically fraught issue that determines the outcome of elections. In countries with stable
inflation rates, it is much less of an issue.
(i)
(ii)
What is the difference between the real and the nominal GDP ?
Why you think it is real GDP is better indicator of economic growth?
2. In order to calculate real GDP per capita, you need to know:
(i) nominal GDP and inflation rate.
(ii) real GDP and inflation rate.
(iii) real GDP and population size
3. What does economic boom and busts mean?
4. Generally, expansionary economic policies are pursued during recession and
contractionary economic policies during boom period. Do you agree? Explain.