Econ100bHW1

# Econ100bHW1 - University of California Santa Cruz Econ...

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University of California, Santa Cruz Spring Quarter 2008 Econ 100B-01 Jesus Sandoval-Hernandez INTERMEDIATE MACROECONOMICS Problem set 1 Answer Key 1. Problem 4, Chapter 2 of Blanchard a. Nominal GDP 2006 = Prices in 2006 * Quantities in 2006 = 2000*10 + 1000 * 4 + 1 * 1000 = \$25,000 Nominal GDP 2007 = Prices in 2007 * Quantities in 2007 = 3000*12 + 500 * 6 + 1 * 1000 = \$40,000 growth rate of nominal GDP = g(nominal)=(40,000 – 25,000) / 25, 000 = 0,6=60% b. Real GDP using 2006 as the base year, i.e. using 2006 prices: Real GDP 2006 = Nominal GDP 2006 = 25.000 Real GDP 2007 = Prices in 2006 * Quantities in 2007 = 2000 * 12 + 1000 * 6 + 1 * 1000= \$31,000 growth rate of real GDP using 2006 prices = g (real2000) = (31,000 – 25,000) / 25,000 = 24% c. Real GDP using 2007 as the base year, i.e. using 2007 prices: Real GDP 2006 = Prices in 2007 * Quantities in 2006 = 3000 * 10 + 500 * 4 + 1 * 1000= \$33,000 Real GDP 2007 = Nominal GDP 2007 = 40.000 growth rate of real GDP using 2007 prices = g (real2007) = (40,000–33,000)/33,000 = 0,21=21% d. Choice of base year matters for the calculated growth rate of real GDP. The reason is that one set of prices (from one possible base year) may assign different relative weights to the same quantities than another set of prices (from another possible base year). For instance, if 1960 prices were used and the price of a house and a computer was the same in 1960, GDP today would increase by the same amount and have the same growth rate whether we produced an additional computer or built a new house. If instead we used 1970 prices, where the price of computers was maybe half that of a house, GDP today would increase only half as much if we produced an additional computer compared to if we built a new house. So if we chose to produce the computer instead of the house, using different prices would imply different dollar-increases in GDP. The only way we could get the same growth rate using either set of prices is by coincidence: Growth rate of real GDP = change in real GDP year 0-1/real GDP year 0.

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Econ100bHW1 - University of California Santa Cruz Econ...

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