MidtermOct16_Solutions (1).pdf

# MidtermOct16_Solutions (1).pdf - ECON 330 Midterm...

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1. (40pts) Basic concepts (a) (20pts) (i) Define real GDP per capita. (ii) Explain why imputations are required for certain goods and services in order to calculate GDP, and give two examples of how this is done. (iii) Explain why the slope of a time series of real GDP per capita does not equal the growth rate. (iv) Why do economists prefer real GDP over nominal GDP? Answer: (i) GDP is the total market value of all final goods and services produced domestically within a certain period of time, usually one year. Real GDP means that a constant set of prices is used to calculate GDP, and per capita means that real GDP is divided by the country’s popu- lation size. (ii) For certain goods and services imputations are required since they comprise an important part of the economy (e.g. government services, housing) but lack a market price since they are not traded in a market. Since GDP is the market value, but there is no market price available, such a price must be imputed, e.g. for homeowners: rent the owner pays to himself, government services: valued at cost. (iii) The growth rate is given by g t,t +1 = y t +1 - y t y t but the slope of a time series is y t +1 - y t which are obviously not the same. (iv) Economists prefer real
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