Spring_Problem_Set_2_Solutions

Spring_Problem_Set_2_Solutions - 1. Measuring a Nations’...

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Unformatted text preview: 1. Measuring a Nations’ Income: a. Calculate the Gross Domestic Product (GDP) in 2005 in the country of Parlavia using data from the table below. Consumption $9,300 Investment $2,100 Government Purchases $1,600 Exports $2,000 Imports $2,900 GDP=C+I+G+NX= $12,100 b. Calculate the country’s Net Exports. NX=Exports – Imports = $-900 c. Given that the Real GDP for Parlavia in 2005 was $16,700, calculate is the GDP deflator for 2005? GDP Deflator= [Nom GDP/Real GDP] *100 = [$12,100/16,700]*100=1.04*100= 73.46 d. List 2 reasons why GDP not be an accurate measure of economic well-being? Choose 2: GDP Doesn’t take into account quality of life GDP Doesn’t measure wealth generated through illegal activities GDP does not measure distribution of income GDP excludes quality of the environment 2. Measuring the Cost of Living: Given the following basket of goods that a typical Cadet purchases Good Quantity 2003 2004 2005 Gatorade 100 $1 $1.25 $1.50 Laptop 1 $1200 $1300 $1400 Pizza 70 $10 $12 $15 Textbook 16 $40 $55 $70 a. Calculate the cost of the (Cadet) basket in 2003, 2004, and 2005 To calculate the cost of the basket, multiply Price * Quantity for each year. Quantity remains the same (hence why we say a “fixed” basket of goods) each year. 2003: $2,640 2004: $3,145 2005: $3,720 b. Calculate the Consumer (Cadet) Price Index (CPI) in the base year 2003, and in 2004. 2003: [Basket Value 2003/Basket Value in Base Year (2003)] * 100 = [$2,640/$2,640]*100= 1*100=100 2004: [Basket Value 2004/Basket Value in Base Year] *100 = [$3,145/$2,640] * 100= 1.19*100=119 c. Calculate was the inflation rate from 2004 to 2005? You need to compute the CPI for 2005 before you can solve for inflation from 2004 to 2005. 2005: [Basket Value in 2005/Basket Value in Base Year]*100 = [$3,720/$2,640]*100=1.409*100=141 Inflation= [CPI 2005 – CPI 2004]/ CPI 2004 = [141-119]/119=18% d. Laptops began to increase in complexity and functionality from 2003 to 2005 to include the ability to link with Pocket PCs and Palm-Pilots and other technological advances thereby decreasing cadets’ need for other devices (i.e. calculators and palm-pilots). Which one of the following statements is true? a. The CPI underestimates the cost of living for cadets b. The CPI overestimates the cost of living for cadets c. The CPI accurately estimates the cost of living for cadets e. List two reasons why the CPI may be an imperfect measure of the cost of living for cadets. There are actually three reasons, choose any two below: 1. Unmeasured quality change: CPI doesn’t take into account changes in the quality of goods and services. (In our example, laptops increased in complexity and therefore reduced the need for expensive calculators that cadets used to have to buy.) 2. substitution bias – if the price of a good increases, consumers normally find a substitute and purchase it. But since the basket of goods is fixed, it doesn’t account for the change in quantity sold of the good that increased in price.change in quantity sold of the good that increased in price....
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This note was uploaded on 04/17/2008 for the course ECON SS201 taught by Professor Evans during the Spring '08 term at West Point.

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Spring_Problem_Set_2_Solutions - 1. Measuring a Nations’...

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