Macroeconomic Aggregates:
Exercises and Applications
Lecture 10 – academic year 2013/14
Introduction to Economics
Fabio Landini
1
Ex. 10.1 – US’s GDP
Question:
Suppose to measure the GDP of US summing the value
of all final goods and services in the economy.
Determine the effects on GDP of the following
transactions:
a) A restaurant purchases fish for $100 from a fisher;
b) A household spend $100 eating fish in a restaurant;
c) Delta Airlines buys a new jet from Boing for
$200million;
d) A Greek airline company buy a new jet from Boing
for $200million;
e) Delta Airlines sells on of her jet to Denzel
2
Ex. 10.1 – US’s GDP
Answer:
a) A restaurant purchases fish for $100 from a fisher;
Definition of GDP:
The GDP is the market value of final goods and services
produced within a country in a given period of time
Therefore, the right answer is no change: this transaction
is a purchase of an intermediate goods.
3
Ex. 10.1 – US’s GDP
Answer:
b) A household spend $100 eating fish in a restaurant;
Composition of GDP from the point of view of demand:
Z=C+I+G+X–M
+$100 GDP: personal consumption expenditure
4
Ex. 10.1 – US’s GDP
Answer:
c) Delta Airlines buys a new jet from Boing for $200million;
Composition of GDP from the point of view of demand:
Z=C+I+G+X–M
+$200m GDP: Gross private domestic fixed investment
5
Ex. 10.1 – US’s GDP
Answer:
d) A Greek airline company buy a new jet from Boing for
$200million;
Composition of GDP from the point of view of demand:
Z=C+I+G+X–M
+$200m GDP: next export
6
Ex. 10.1 – US’s GDP
Answer:
d) Delta Airlines sells on of her jet to Denzel Washington
for $100million;
No change. The jet was already counted when it was
produced, i.e., presumably when Delta (or some other
airline companies) bought it new as an investment.
7
Ex. 10.2 – Mines and Jewels
Consider an economy where:
i) A company that extract argent pay workers
€200,000 to extract 75 kg of argent. The argent is then
sold to a jeweller for €300,000;
ii) The jeweller pays her workers €250,000 to produce
necklaces, which are then sold to final consumers for
€1 million;
8
Ex. 10.2 – Mines and Jewels
Questions:
a) Using the approach based on the “value of final
goods”, how much is the GDP of this economy;
b) Which is the value added at each stage of
production? Using the approach based on the added
value, how much is the GDP of this economy?
c) What is the value of of total wages and profits? Using
the approach based on income, how much id the GDP
of this economy?
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Ex. 10.2 – Mines and Jewels
Answer:
a) GDP using the value of final goods;
Using the approach base don the value of final goods,
the GDP = €1 million, i.e., the value of the silver
necklaces
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Ex. 10.2 – Mines and Jewels
Answer:
b) Added valued and GDP;
The economy is based on two sectors:
Mines – A.V. = €300,000;
Jewels – A.V. = 1,000,000 – 300,000 = €700,000
GDP = sum of A.V. of the two sectors =
= 300,000 + 700,000 = €1,000,000 (same as before)
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Ex. 10.2 – Mines and Jewels
Answer:
c) Wages, profits, and GDP;
Wages: 200,000 + 250,000 = €450,000
(Mines)
(Jewels)
Profits: (300,000-200,000) + (1,000,000-250,000-300,000)=
(Mines)
(Jewels)
= 100,000+450,000= €550,000
GDP = sum of wages and profits in the two sectors=
= 450,000 + 550,000 = €1,000,000 (same as before)
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Ex. 10.3 – Cars, CPU and Oranges (I)
An economy produces three goods: cars, computers
and oranges. Quantity and unitary prices for the years
2006 – 2007 are the following:
2006
2007
Quantity
Price
Quantity
Price
Cars
10
€2,000
12
€3,000
Computers
4
€1,000
6
€500
Oranges
1,000
€1
1,000
€1
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Ex. 10.3 – Cars, CPU and Oranges (I)
Questions:
a) Which is the nominal GDP of the of the economy in
2006 and 2007? How much does it vary?
b) Using the 2006 prices as a basis, which is the real
GDP in 2006 and 2007? How much does it vary?
c) Using the 2007 prices as a basis, which is the real
GDP in 2006 and 2007? How much does it vary?
d) Why doe the growth rates in b) and c) differ? Which
is the most appropriate? Motivate your answer.
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Ex. 10.3 – Cars, CPU and Oranges (I)
Answer:
a) Which is the nominal GDP of the of the economy in
2006 and 2007? How much does it vary?
Definition: Nominal GDPt = pricet x quantityt
2006 GDP: 10(2,000)+4(1,000)+1,000(1)=€25,000
2007 GDP: 12(3,000)+6(500)+1,000(1)=€40,000
% Δ = (40,000-25,000)/25,000 -> +60% nominal GDP
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Ex. 10.3 – Cars, CPU and Oranges (I)
Answer:
b) Using the 2006 prices as a basis, which is the real
GDP in 2006 and 2007? How much does it vary?
2006 real GDP: €25,000
2007 real GDP: 12(2,000)+6(1,000)+1,000(1)=€31,000
% Δ = +24% real (2006) GDP
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Ex. 10.3 – Cars, CPU and Oranges (I)
Answer:
c) Using the 2007 prices as a basis, which is the real
GDP in 2006 and 2007? How much does it vary?
2006 real GDP: 10(3,000)+4(500)+1,000(1)=€33,000
2007 real GDP: €40,000
% Δ = +21.2% real (2007) GDP
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Ex. 10.3 – Cars, CPU and Oranges (I)
Answer:
d) Why doe the growth rates in b) and c) differ? Which
is the most appropriate? Motivate your answer.
The answers measure GDP in different units. Neither
answer is incorrect, just as measurements in
centimetres is more or less correct than measurements
in inches
18
Ex. 10.4 – Cars, CPU and Oranges (II)
Consider the same economy described before.
Questions:
Suppose that we use the 2006 prices as the basis to
compute the real GDP in 2006 and 2007. Compute the
GDP deflator for the year 2006 and 2007, and the
inflation rate between 2006 and 2007
19
Ex. 10.4 – Cars, CPU and Oranges (II)
Answer:
Nominal GDP
GDP Deflator:
Real GDP
Deflator 2006 = 1 (we use 2006 prices as basis)
Deflator 2007 = €40,000/€31,000=1.29
Inflation rate:
-> 29%
20
Ex. 10.4 – Cars, CPU and Oranges (II)
Answer:
Nominal GDP
GDP Deflator:
Real GDP
Deflator 2006 = 1 (we use 2006 prices as basis)
Deflator 2007 = €40,000/€31,000=1.29
Deflatort - Deflatort-1
Inflation rate:
-> 29%
Deflatort-1
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