Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Econ 102 Discussion Section 4 (Chapter 8, 10.1 and 11) February 6, 2015 Real vs. Nominal GDP Nominal GDP is defined as GDP that has not been adjusted for prices and has been calculated using the prices in the year in which the output is produced. Real GDP is GDP calculated as if prices had remained at the level of some given base year. There are two methods to solve problems involving real/nominal GDP. One involves using the pricequantity method and the other involves a new formula comparing real/nominal GDP Revisiting the Quantity Method πππππππ πΊπ·π = !"##$%& !"#$ ! π! !!! π! π πππ πΊπ·π = !"#$ !"#$ ! π! !!! π! Example 1: An economy produces two goods: hot dogs and burgers. In 2014, 15 hot dogs are produced at a price of $2 each, and 20 burgers at a price of $7 each. In 2015, 20 hot dogs are produced at a price of $4 each, and 30 burgers at a price of $8 each. Find the following: Nominal GDP of 2014: (15 x 2) + (20 x 7) = 170 Nominal GDP of 2015: (20 x 4) + (30 x 8) = 320 Real GDP of 2014 using 2014 as base year: 170 Real GDP of 2015 using 2014 as base year: (20 x 2) + (30 x 7) = 250 The GDP Deflator πππππππ πΊπ·π ×100 π πππ πΊπ·π The GDP Deflator is an index number. It is a data point reflecting the price level compared to some base level, which is almost always 100. Note that the GDP Deflator can be used to find the inflation rate over two years. πΊπ·π π·πππππ‘ππ = Example 2: Using the information from Example 1, and assuming that 2014 is the base year, calculate the GDP Deflator in 2014 and 2015 along with the inflation rate between the two years. GDP Deflator 2014 = 100 GDP Deflator 2015 = (320 / 250) x 100 = 128 Inflation Rate between 2014 and 2015 = 28% Other Measure of Total Production and Income Gross National Product: GNP = GDP + Net Factor Income Earned from Abroad Net National Product: NNP = GNP β Depreciation National Income: NI = NNP β Indirect Business Taxes Personal Income: PI = NI β Corporate Taxes + Transfer Payments Disposable Personal Income: DPI = PI β Personal Income Taxes Page 1 Econ 102 Discussion Section 4 (Chapter 8, 10.1 and 11) February 6, 2015 Long Run Economic Growth and Calculating Growth Rates Real GDP per capita is the key statistic used to track economic growth π πππ πΊπ·π π πππ πΊπ·π πππ πππππ‘π = ππππ’πππ‘πππ For a single year, the economic growth rate is determined by the percent change in Real GDP per capita from the beginning of the year to the end of the year. When we are dealing with multiple years, we are often also concerned about the average annual economic growth rate, which is the average of the economic growth rate over multiple years Over longer periods of time, the relationship between the annual growth rate of real GDP per capita and long run changes in real GDP per capita can be summarized using the rule of 70, which tells us how long it takes any variable that grows over time to double: 70 ππ’ππππ ππ π¦ππππ πππ π£πππππππ π‘π πππ’πππ = πΊπππ€π‘β πππ‘π ππ π£πππππππ Another useful concept to be mindful of is compounding. Typically thought of in the context of interest rates, compounding illustrates how small changes in growth rates can lead to large differences in the interest earned on an asset or in the real GDP per capita between two countries. Example 3: Suppose that the real GDP per capita in the US is currently $8 million, and in Ghana it is $2 million. Furthermore assume that the US economy is growing at 7% per year while Ghana is growing at 14% per year. How long will it take for Ghanaβs GDP to catch up with the United States? When discussing long run economic growth, economists often refer to potential GDP. Potential GDP is the level of real GDP produced when firms are producing at capacity. Note however the producing at capacity does not mean producing the maximum amount of goods possible. Rather, capacity is defined as the point where firms are operating at normal hours, with a normal sized workforce (i.e. unemployment neither too high nor too low). Long run growth is dependent on increases in labor productivity. This can be obtained in one of two ways: increases in capital per hour worked or technological change. Increasing the capital per hour worked could for instance mean increasing the number of ovens available per chef in a bakery, while technological change could possibly mean improving the baking speed of said ovens Page 2 Econ 102 Discussion Section 4 (Chapter 8, 10.1 and 11) February 6, 2015 Practice Problems 0. An economy produces two goods: tomatoes and ketchup. It is assumed that half of the tomatoes are bought and consumed as final good, the other half is used to produce ketchup. In 2014, 30 lbs. of tomatoes are produced at $2 each, and 20 oz. of ketchup at $7 each. In 2015, 40 lbs. of tomatoes are produced at $4 each, and 30 oz. of ketchup at $8 each. Find the following: Nominal GDP of 2014: Nominal GDP of 2015: (15 x 2) + (20 x 7) = 170 (20 x 4) + (30 x 8) = 320 Real GDP of 2014 using 2014 as base year: Real GDP of 2015 using 2014 as base year: 170 (20 x 2) + (30 x 7) = 250 Inflation Rate between 2014 and 2015 28% 1. Suppose that nominal per capita GDP was $40,000 in 2000 and $60,000 in 2007. If the GDP deflator was 100 in 2000 and 150 in 2007, indicate the 2007 per capita real GDP measured in 2000 dollars. a) $32,000 b) $38,000 c) $40,000 d) $42,500 2. According to the following table, what is the GDP deflator in 2005? 2004 2005 Nominal GDP $10,000 $12,000 Real GDP $8,000 $10,000 a) 125 b) 120 c) 87 d) 105 3. To examine how the production of goods has changed over time, it would be better to consider: a) nominal GDP b) GDP at current prices c) real GDP d) the GDP deflator 4. If real GDP rises while nominal GDP falls, the prices on average have: a) fallen b) risen c) stayed the same d) Real GDP cannot rise when nominal GDP falls 5. If nominal GDP exceeds real GDP for a specific year, then the GDP deflator must be: a) less than zero b) less than 100 c) greater than 100 d) equal to 100 6. If the quantity of goods and services produced in the economy decreases, a) real GDP would certainly increase b) it may be possible for real GDP to increase c) nominal GDP would certainly increase d) it may be possible for nominal GDP to increase 7. If the amount of transfers from government to household increases given the same level of GDP, this would _______. a) increase GNP b) increase PI c) increase DPI d) No effects on any measures of income Page 3 Econ 102 Discussion Section 4 (Chapter 8, 10.1 and 11) February 6, 2015 Use the following information to answer the next four questions βBirch from Brazilian forests is used by a U.S.-owned company located in Canada to produce snowboard. Snowboard is sold in the U.S. The workers working in this factory is Mexican.β (True / False) Birch wood exported is recorded in Brazilβs GDP (True / False) Snowboard is counted as final good in Canadaβs GDP (True / False) Mexican workers in this factory contributes to Mexicoβs GDP (True / False) This transaction contributes zero to U.S.βs GDP 8. In 1990 real GDP per capita in the US was $40000. In 2004 real GDP per capita was $80000. What was the average annual growth rate of real GDP per capita in the US during this time? a) 100% b) 5% c) 10% d) 7.1% 9. If you put your $100 into a saving account which earns 5% interest, how long does it take for your money to double? 14 years 10. If an economy is growing at 6% a year while the population is growing at 3% a year, what is true about this economy? a) The standard of living is rising b) The standard of living is falling c) The standard of living is not changing d) Indeterminate Use the following table to answer the next two questions Bank Interest in 2013 Interest in 2014 US Bank 5% 5% UW Credit Union 2% 4% Interest in 2015 5% 8% 11. Suppose you have $100 to invest. Which bank would provide the most interest at the end of the three years? a) US Bank b) UW Credit Union c) They provide the same interest 12. Which concept does previous question best illustrate? a) Rule of 70 b) Real vs Nominal GDP c) Compounding d) Inflation Page 4