Question

Recall the method of calculating real GDP detailed in the chapter. As you may already have noticed, this method has a problem: in calculating aggregate output, this method weights the output of the various goods and services by their relative prices in the base year. Say, for example, a textbook costs $100 in the base year, and a laptop costs $2,000. This means that the laptop would have 20 times the weight of a book in calculating aggregate output. But what happens when relative prices change? As you know, the prices of most high-tech items, including laptops, have generally been decreasing over time. Suppose the price of a laptop declined from $2,000 to $1,000 in the period from the base year to the current year. Now, a laptop costs only 10 times as much as the book. So, using base-year relative prices would overweight laptops in calculating real GDP in the current year. In response to this problem, in 1996 the BEA switched to what is called a chain-weighted method of calculating real GDP. Say the base year is 2008. To calculate the growth rate of real GDP between 2008 and 2009, for example, the BEA calculates real GDP for 2008 using 2008 as the base, and then real GDP for 2008 using 2009 as the base. Then, the bureau calculates real GDP for 2009 using 2009 as the base, and real GDP for 2009 using 2008 as the base. For each base, the growth rate is then calculated as: 2009 GDP (2008 Base) - 2008 GDP (2008 Base) 2008 GDP (2008 Base) and 2009 GDP 2009 Base) - 2008 GDP 2009 Base) 2008 GDP 2009 Base) So, they end up with two different growth rates, which are then averaged. Given this averaged growth rate, and the level of GDP in 2008 at 2008 prices, the bureau then calculates real GDP for 2009 as one plus the average growth rate previously calculated, times 2008 output in 2008 dollars. The growth rate between 2009 and 2010 is then calculated similarly. Suppose that laptops, economics textbooks, and energy drinks are the only three goods produced in the United States. The following table gives the quantity of each produced in millions) and their price in the years from 2010 to 2012: Laptops Price Quantity $1,4007 $1,100 9 $900 2010 2011 2012 Textbooks Price Quantity $1706 $180 8 $200 Energy Drinks Price Quantity $3 30 40 Complete the following table by calculating nominal GDP and real GDP (using 2010 as the base year) for each year. (Enter your responses as integers.) Nominal GDP Real GDP 2010 Base) 2010 2011 2012 Using the chain-weighted method outlined above, real GDP for 2011 is $1 (Round your response to the nearest dollar.) Using the chain-weighted method again, real GDP for 2012 is $ . (Round your response to the nearest dollar.) Enter your answer in each of the answer boxes.

Answer 1

Tent books Laptops Price Quality Energy drinks Price Quantity Price $170 Quantity 6 2010 zo $1450 7 $180 $ 200 for of 8 q 2011 2012 gs 35 40 $11.00 a $900 a Now, Nominal GDP in 2010! $|| 1400 7) + (170X6) + (3083) = $ 10910 Nominal GDP in 2014? $T (1100x9) + (186 x0) + (5x35) = $11515 and Nominal GDP in 2012! $r ( qoox q) + (200 X9) + (5 x 40) ( - $40100 Now. Real LDP in 2010 lising 20 lo as boey can! $ 1400x7) + (170 X6) + (3730)] = $10910 Scanned with CamScanner

Real LD p in 2011 (using 20 10 as bose year) =(2010 Puces X 2011 quantitics) = $( 1400 Y a) +1 17038)+( 3835)] = $ 14065 Real GDP in 2012 ( ming 2010 as base year) =(2010 Pius X 2012 quantities] = $(1400x9) + ( 170X9) + ( 3x40) | $ 14250 table . fill up the Now we can Nominal app Real LDP (201o Base) 2010 $ $ $ 10910] 11515 ] 10900 ] $ 10910 $ [14065] $ 14 250 ] 2011 2012 Now, Real LD P for 2011 using clain-weighted method 2011 GDP (2010 base) - 2010 G PP (2010) - 2010 GOP (2010 base) Scanned with CamScanner

Now Real a DP of 2011 (2044 base) will be a = $T $11100 x 9) +(18088 74 (3545) / - $ 41515 Wead GDP 201) ( 20 ), ba) siz kr $ 14065 Now Real GDP of 2010 (2010 buse ) will be =$10910 Brett Real GDP of 2010 (2044 base) will be? $T (1100x7) + (180X6) + (5X30)7 = $ 8930 Now, = s0230 for base y eas 2010 wowth rate of Real LDP 2011 GDP ( 2010 besc) - 2010 GDP ( 2010 base) = 200A 2010 GDP (2010 buse) § (14065-10910) $ ( 10190) = 0.34 for buse year 2011, Gorowth rate of Real LDP 2011 ADP ( 2017 buse) - 2010G DP (2011 bee] Now 2010 GDP (2011 boxc) § (11515-8939)_ . 0.29 $ 8930 cs Scanned with CamScanner

Now the avuage of these two growth rates! - 10.3+0.24) -013 2 Now, leuce of app in 2010 in 2010 prius = $ 10910 Hunce Real ADP for 2 011 = (t annaged que ' = (itav naged growth rate) 1 * 10910 (1+ 0.3) * 10910 = = $ 14183 Now, Real GDP of 2010 si (2010 buse year] $ 10910 Real GDP of 2010 ( 2012 buse year) = $ [(900x7)+ (200 X6) + (5x30)7 $7650 Real app or 2012 ( 2012 Pum) = $ [ (900x9) + (200x9) + (5 x40)] = $ 10100 Real GDP of 2012 (2010 buse year) . $44250 Scanned with CamScanner

Now for buse year 2010, growth rate ist 2012 ADP ( 2010 base) - 202040P(2010bwe) 2010 ADP (2010 buse) = $ ( 14 250-10910) -= 0.31 $ 10910 Now S- for buse year 2 012 , growth rate is! 2012 GDP ( 20.12 base) - 2010 GDP/2012 bone) 2010 20P (2012 bese) $( 10100 - 7650) - 0.32 $7650 average of Now this two growth rates · 10:31+0.32) _ 0.315 2 (0:3170132] 2 Now levce of aDP is 2012 2010 in 2010 Pius = $ 10910 Hace Real ADP for 2012 = (1+0.315) 1 X 10910 = $ 14346.65 ł $ 143471 Scanned with CamScanner