Homework #1 Answers ECO 310 20 points possible

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National Income Accounting (15 points)

Consider an economy that produces and consumes bread, coffee, and automobiles. In the following table, we have data for two different years. The first 2 questions refer to this table. Year 2007 Year 2008 $20,000 $21,000 $1.25 $1.50 $2.00 $2.10 100 120 100,000 115,000 400,000 380,000

Price of 1 Automobile Price of 1 loaf of Bread Price of 1 cup of Coffee Number of Automobiles Produced Number of Cups of Coffee Produced Number of Loaves of Bread Produced

1. Using the year 2007 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the GDP deflator (a Paasche price index) and the CPI (a Laspeyres price index). For the CPI, assume that the representative basket of goods is exactly the one produced in the year 2007 Answer: To calculate nominal GDP for 2007 is $20, 000 ∗ 100 + $1.25 ∗ 400, 000 + $2 ∗ 100, 000 = $2, 000, 000 + $500, 000 + $200, 000 = $2, 700, 000 for 2008 $21, 000 ∗ 120 + $1.50 ∗ 380, 000 + $2.1 ∗ 115, 000 = $2, 520, 000 + $570, 000 + $241, 500 = $3, 331, 500 To calculate real GDP for 2007, since 2007 is the base year real GDP 2007 equals $2,700,000

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for 2008 just use the 2007 prices $20, 000 ∗ 120 + $1.25 ∗ 380, 000 + $2 ∗ 115, 000 = $2, 400, 000 + $475, 000 + $230, 000 = $3, 105, 000 The amount of stuff produced in 2008, at 2007 prices is the real GDP in 2008 To calculate the GDP deflator in both years simply divide Nominal GDP by Real GDP, so for 2007 GDP def lator 2006 = $2.7 million/$2.7 million = 1 and for 2008 GDP def lator 2007 = $3, 331, 500/$3, 105, 000 = 1.073 For the CPI , just calculate it as a Laspeyres price index so that a0 pat + b0 pbt + c0 pct CP It = a0 pa0 + b0 pb0 + c0 pc0 where a stands for autos and b stands for bread. Since 2007 is the base year the CPI equals one. For 2008, CP I2010 = 100 ∗ $21, 000 + 400, 000 ∗