Question

Date Due Which component includes Why are transfer payments are Name: GDP: Measuring a Nation's income Why does Total Income Total Expenditure Which component of GDP is the largest household purchases of new housing? excluded from GDP? GDP Calculation. SHOW ALL YOUR WORK O of Por of Com Pof Com Wheat Wheat 100 SS S 10 1999 200 $6 $ 10 2000 300 57 59 O of Rice Por Rice 388 100 90 80 $2 $3 $3 Calculate Nominal GDP 1998: 1999 2000 If Total Spending (Nominal GDP) rises from one year to the next, what are the 2 potential reasons! 1 2 Calculate Real GDP (Base year 1998) 1998: 1999 2000: What does real GDP measure by holding the price level constant? Calculate the GDP Dator 1998: 1999 2000: What is happening to the Price Level in this economy? Calculate the Growth Rate of the GDP Deflator 1998-1999: 1999-2000: Calculate the Growth Rate of Output (Percentage change in Real GDP). 1998-1999 1999-2000 What is a recession?

Answer 1

(1) Total Income equals Total Expenditure

Reason: Total expenditure refers to the total spending on goods and services during a certain period of time (say, a year). On the other hand, Total Income refers to the sum total of income received from the sale of goods and services during a certain period of time (say, a year). The amount spend by first person goes to second person as income, amount spend by second person goes to third person as income and so on. Since, every such act of expenditure/ spending results in income for someone else, total expenditure equals total income in the economy. For e.g., when a customer goes to buy cake, the amount given by the customer to the cake baker becomes his/her income.

(2) Consumption Expenditure is the largest component of GDP ( accounts for about two-thirds of GDP every year). This is the indication of the fact that consumers spending is one of the major drivers of the economy.

(3) Investment Expenditure is the component which includes housing purchases of new housing. This is because purchasing a house is considered as a durable investment as it accrues benefits for a longer period of time.

(4)  Transfer Payments are made by the government as ‘one-way’ payments of money for which no goods, money or services is received in exchange. They do not reflect the actul production in the economy. Therefore, they do not form a part of GDP.

(5) Nominal GDP is the GDP measured as per current market prices, whereas Real GDP is the GDP measured as per prices of some base year

Year	Nominal GDP
1998	(100 * $5)+(50 * $10)+(100 * $2) = $ 1,200
1999	(200 * $6)+(70 * $10)+(90 * $3) = $ 2,170
2000	(300 * $7)+(60 * $9)+(80 * $3) = $ 2,880

Two potential reasons for rise in Nominal GDP are:

• producation or quantity of output has increased
• prices at which goods and services are being sold in the market have increased

Year	Real GDP
1998	(100 * $5)+(50 * $10)+(100 * $2) = $ 1,200
1999	(200 * $5)+(70 * $10)+(90 * $2) = $ 1,880
2000	(300 * $5)+(60 * $10)+(80 * $2) = $ 2,260

Real GDP reflects the value of all the goods and services produced in the economy during a year (keeping the price level constant). Real GDP makes comparison of GDP from year to year more meaningful because it shows comparisons for both the quantity and value of goods and services.

GDP Deflator= Nominal GDP * 100 / Real GDP

Year	GDP Deflator
1998	1200 * 100 / 1200 = 100%
1999	2170 * 100 / 1880 = 115.43%
2000	2880 * 100 / 2260 = 127.43 %

The price level in the economy is rising in each year. It is an indication of inflation in the economy.

Growth Rate of GDP Deflator

Inflation is equal to the growth rate of the GDP deflator.

It is calculated as follows

(GDP deflator of Year 2) - (GDP deflator of Year 1) * 100 / GDP deflator of Year 1

1998-1999 : (115.43-100) * 100 / 100 = 15.43%

1999-2000 : (127.43-115.43) * 100 / 115.43= 10.40%

Percentage change in real GDP = (Real GDP of Year 2)-(Real GDP of Year 1) * 100 / Real GDP of Year 1

1998-1999: (1880-1200)*100/1200 = 56.67%

1999-2000: (2260-1880)*100/1880 = 20.21%

Recession: A recession is a phase of business cycle in which there is a significant decline in the economic activity of an economy. During this period, the businesses see less demand and people tend to lose money. It also causes a fall in the stock market and an increase in unemployment in the economy.