Question

Calculate the real GDP for both years using the chain method:

4. (10 points) Consider an economy that produces bicycles and computers. The data for two years, let's call them 1999 and 2000, are given below: 1999 2000 200 Production (quantity) Computers Bicycles Price Computers Bicycles 10 250 $1,200 per computer $200 per bicycle $600 per computer $240 per bicycle Calculate real GDP for both years using the chain method and the year 2000 as the arbi- trary) reference year. Note: the calculation will involve several steps, as discussed in class. In particular, you will need to calculate an index number for both years that tracks the growth of real GDP. Calculating real GDP according to the (old) traditional method will only yield half the points for this question! Show your work and comment on/label each step clearly

Answer 1

		1999	2000
Price	Computers (P1)	$    1,200.00	$        600.00
	Bicycles (P2)	$        200.00	$        240.00
Quantity	Computers (G1)	5	10
	Bicycles (G2)	200	250
A	GDP weighted Current year's prices (nominal GDP)	$ 46,000.00	$ 66,000.00
	(P1 x G1) + (P2 x G2)	$1200*5 +$200*200	$600*10 + $240*250
B	GDP weighted next year's prices	$ 51,000.00
		$600*5 + $240*200
C	GDP weighted last year's prices		$ 62,000.00
			$1200*10 + $200*250
D	Real growth Rate (weight = current year's prices)		0.29411765
	(current year A / Last year's B) - 1		(66000/51000)-1
E	Real growth Rate (weight = last year's prices)		0.34782609
	(current year C / last year A)- 1		(62000/46000)-1
F	Real growth Rate Chain weighted		0.31984651
	sqrt(D*E)		sqrt(0.29412*0.3478)
Chain-weighted Real GDP (Base Year = 2000)		50005.8147	66000
		66000/(1+0.319846)	nominal GDP

since inthe base year Real GDP = Nominal GDP thus the real GDP for 1999 and 2000 is $50005.8147 and $66000 respectively.