Question

8. U.S. GDP in 2012 was $16,020 billion, and GDP in 2013 was $16,570 billion. Did the economy grow from 2012 to 2013 in real terms? The CPI in 2012 was 229.5, and the CPI in 2013 was 233.0.

a. Use the Babe Ruth formula to convert 2013 GDP into 2012 dollars. Show your work.

b. Using your answer from part (a), calculate the real growth rate of the economy from 2012 to 2013. Show your work.

c. Did the economy grow from 2012, or did it decline?

9. Suppose that five years from now, Midwest Bioanalytics Corp. announces record profits, 2% higher than the previous profit record from the year before. During that year, the CPI rose from 275 to 286. What do you think about the firm’s profits in real terms? Does the firm have a good reason to celebrate its higher profits? Explain.

10. Five years from now, when you’ve graduated and started your career, your salary is $65,000 per year. During the following year, the inflation rate is 6%. How much would your salary have to rise during that year to keep the purchasing power (or real value) of your salary from falling? Explain, and show your work.

Answer 1

8.

A.

As per the Babe Ruth formula,

GDP in 2013 dollar = GDP in 2012 dollars* (CPI of 2013/CPI of 2012)

Then,

16570 = GDP in 2012 dollars*(233/229.5)

GDP in 2012 dollars = 16570*229.5/233

GDP in 2012 dollars = $16321.09 Billion

B.

Real growth rate from 2012 to 2013 = (16321.09-16020)/16020

Real growth rate from 2012 to 2013 = 1.88%

C.

GDP grew from 2012 to 2013 in real terms as the real GDP growth rate of the economy from 2012 to 2013 was positive and it was 1.88%. Economy growth took place.

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