Download Explain the difference between GDP and GNP

Assignment #1 Solution
INTRODUCTION TO MANAGERIAL
ECONOMICS
Total Marks:10
Q#1Explain the difference between GDP and GNP. (3)
Ans:
GDP represents the market value of all final goods and services produced in a country
during a given period.
GNP represents the market value of all final goods and services produced by
domestically owned factors of production in a given period.
Goods produced, for example, by a U.S. citizen living outside the United States would
not be included in GDP but would be included in GNP. Goods produced in the United
States, regardless of who produces them, would be included in GDP.
Q#2Explain why real GDP is a more reliable estimate of economic growth. (2)
Ans: Growth in nominal GDP can be a result of higher prices, higher output, or both.
Growth in real GDP calculates growth in output (production), which is what the economy
needs. Growth in nominal GDP calculates growth in production and in prices.
Q#3 A farmer grows a bushel of wheat and sells it to a miller for $1.00.The miller
turns the wheat into flour and then sells the flour to a baker for $3.00.The baker
uses the flour to make bread and sells the bread to an engineer for $6.00.The
engineer eats the bread. What is the value added by each person? What is GDP?(2)
Ans: Value added by each person:
Value added by farmer = $1
Value added by miller = $2 (selling price of wheat – purchasing price of wheat)
Value added by baker = $3 (selling price of bread – purchasing price of flour)
GDP = price of final good
GDP = $6
Q#4 Suppose you are a senator writing a bill to index social security and federal
pensions. That is, your bill will adjust these benefits to offset changes in the cost of
living. Will you use the GDP deflator or the CPI? Why?(3)
Ans: Being the senator I will use CPI to present bill to social security and federal
pensions. Because CPI measures the over all level of prices and it is used to track the
changes the typical household cost of living. It also adjusts many contrasts for inflation.
But GDP deflator only shows the changes in prices and measures the inflation rate.
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