Question

DO #4

Real GDP is intended to measure the real value of goods and services produced, not the stock of money, or the balance in your bank account, or whether you are in debt or not. To do this, we may use information on total expenditures - measured in dollars - but the purpose is always to recover an index of real output. For this homework, you need the following information to calculate real GDP over several periods. First, you know total expenditures (dollars spent) on three different kinds of goods

2015 20162017 Burritos $3000 $3600 $4200 Diet Coke $1500 $2000 $2000 Vape pens N/A $1000 $6000

where the “N/A” for vape pens is because no one collected data on this in 2015 because they were still pretty new. You also have price data that was collected on several items.

Given that information, you need to calculate an index of real GDP for the economy. To start, just focus on the 2016 and 2017 numbers.

4.. Okay, now go back and redo the calculations of real GDP, but this time comparing 2015 to 2016. You’ll notice that you do not have any information on vape pens from 2015, either in expenditure or price. You’ll have to come up with some way of including vape pens in your calculation, because they do show up in 2016. That means you need some way of comparing the quantity and/or price of vape pens between 2015 and 2016. There is no right answer. There are multiple things one could do, but you should justify in writing why you chose what you chose.

Answer 1

Let us consider the price of Vape Pens for the year 2015 be Px and the quantity of VP consumed be X. Thus total expenditure in 2015 on VP will be Px(X).

Now we have to calculate the real GDP for year 2016 with base year as 2015.

Therefore we will multiply the quantities of year 2016 with the prices of 2015.

1.Burritos : 600×5=$3000

2. Diet Coke : 2000×1=$$2000

3. Vape Pen: 100×Px = 100Px

Since the total expenditure on cigarettes is not available, we won't be including it.

Thus real GDP for 2016 with base year 2015 is : 3000+2000+100Px

=5000+Px