# econ303-hw1-spring14-solution - Econ303 Homework Assignment...

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1 Econ303 Homework Assignment 1 Solutions1. a. No change. This transaction is a purchase of intermediate goods. b. +\$100: personal consumption expenditures c. +\$200 million: gross private domestic fixed investment d. +\$200 million: net exports e. No change. The jet was already counted when it was produced, i.e., presumably when Delta (or some other airline) bought it new as an investment. 2. a. i. Nominal GDP is the total value of goods and services measured at current prices. Therefore, Nominal GDP2000 = () + () = (\$50,000 ×100) + (\$10 ×500,000) = \$5,000,000 + \$5,000,000 = \$10,000,000. Nominal GDP2010 = () + () = (\$60,000 ×120) + (\$20 ×400,000) = \$7,200,000 + \$8,000,000 = \$15,200,000. ii. Real GDP is the total value of goods and services measured at constant prices. Therefore, to calculate real GDP in 2010 (with base year 2000), multiply the quantities purchased in the year 2010 by the 2000 prices: Real GDP2010 = () + () = (\$50,000 ×120) + (\$10 ×400,000) = \$6,000,000+ \$4,000,000 = \$10,000,000. Real GDP for 2000 is calculated by multiplying the quantities in 2000 by the prices in 2000. Since the base year is 2000, real GDP2000 equals nominal GDP2000, which is \$10,000,000. Hence, real GDP stayed the same between 2000 and 2010. iii. The implicit price deflator for GDP compares the current prices of all goods and services produced to the prices of the same goods and services in a base year. It is calculated as follows: Implicit Price Deflator2010 =.
2 Using the values for Nominal GDP2010 and real GDP2010 calculated above: Implicit Price Deflator2010 == 1.52. This calculation reveals that prices of the goods produced in the year 2010 increased by 52 percent compared to the prices that the goods in the economy sold for in 2000. (Because 2000 is the base year, the value for the implicit price deflator for the year 2000 is 1.0 because nominal and real GDP are the same for the base year.) iv. The consumer price index (CPI) measures the level of prices in the economy. The CPI is called a fixed-weight index because it uses a fixed basket of goods over time to weight prices. If the base year is 2000, the CPI in 2010 is an average of prices in 2010, but weighted by the composition of goods produced in 2000. The CPI2010 is calculated as follows: CPI2010 === 1.6. This calculation shows that the price of goods purchased in 2010 increased by 60 percent compared to the prices these goods would have sold for in 2000. The CPI for 2000, the base year, equals 1.0. b. The implicit price deflator is a Paasche index because it is computed with a changing basket of goods; the CPI is a Laspeyres index because it is computed with a fixed basket of goods. The implicit price deflator for the year 2010 is 1.52, which indicates that prices rose by 52 percent from what they were in the year 2000. The CPI for the year 2010 is 1.6, which indicates that prices rose by 60 percent from what they were in the year 2000. If prices of all goods rose by, say, 50 percent, then one could say unambiguously that the price level rose by 50 percent. Yet, in our example, relative prices have changed. The price of cars rose by 20 percent; the price of bread rose by 100 percent, making bread relatively more expensive. As the discrepancy between the CPI and the implicit price deflator illustrates, the change in the price level depends o
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