Question

2.      National income: growth and inflation. Show all calculations.

	2019	2019	2020	2020	2021	2021
	Price	Quantity	Price	Quantity	Price	Quantity
Peaches	$20	100	22	105	24	110
Pears	$4	25	2	50	1	100

a. Compute nominal and real GDP for each year in an economy that produces only 2 goods, peaches and pears. Use 2019 as the base year.

b. Compute the GDP implicit price deflator for each year. Again, use 2019 as the base year.

c. Find the economic growth rates (Y/Y) and the inflation rates (Y/Y).

d. Repeat parts (a)-(c) using 2020 as the base year.

e. Use the chain-weighted method with geometric averaging to compute real GDP with a base of 2019. Find the new growth rates.

f. Discuss and compare your findings of the 3 methods of computing growth rates. (Using 2019, 2020, and chained estimates).

Answer 1

(a)

(1) Nominal GDP (NGDP) = (Current year price x Current year quantity)

2019 = 20 x 100 + 4 x 25 = 2000 + 100 = 2100

2020 = 22 x 105 + 2 x 50 = 2310 + 100 = 2410

2021 = 24 x 110 + 1 x 100 = 2640 + 100 = 2740

(2) Real GDP (RGDP) = (Base year (2019) price x Current year quantity)

2019 = 20 x 100 + 4 x 25 = 2000 + 100 = 2100

2020 = 20 x 105 + 4 x 50 = 2100 + 200 = 2300

2021 = 20 x 110 + 4 x 100 = 2200 + 400 = 2600

(b)

GDP Deflator = (NGDP / RGDP) x 100

2019 = (2100 / 2100) x 100 = 100

2020 = (2410 / 2300) x 100 = 104.78

2021 = (2740 / 2400) x 100 = 112.5

(c)

(1) Economic growth rate = % Change in RGDP

2020 = (2300 / 2100) - 1 = 1.0952 - 1 = 0.0952 = 9.52%

2021 = (2600 / 2300) - 1 = 1.1304 - 1 = 0.1304 = 13.04%

(2) Inflation rate = % Change in GDP Deflator

2020 = (104.78 / 100) - 1 = 1.0478 - 1 = 0.0478 = 4.78%

2021 = (112.5 / 104.78) - 1 = 1.0737 - 1 = 0.0737 = 7.37%

(d)

(1) NGDP remains the same irrespective of base year.

(2) Real GDP (RGDP) = (Base year (2020) price x Current year quantity)

2019 = 22 x 100 + 2 x 25 = 2200 + 50 = 2250

2020 = 22 x 105 + 2 x 50 = 2310 + 100 = 2410

2021 = 22 x 110 + 2 x 100 = 2200 + 200 = 2400

(3) GDP Deflator = (NGDP / RGDP) x 100

2019 = (2100 / 2250) x 100 = 93.33

2020 = (2410 / 2410) x 100 = 100

2021 = (2740 / 2400) x 100 = 114.17

(4) Economic growth rate = % Change in RGDP

2020 = (2410 / 2250) - 1 = 1.0711 - 1 = 0.0711 = 7.11%

2021 = (2400 / 2410) - 1 = 0.9959 - 1 = - 0.0041 = - 0.41%

(5) Inflation rate = % Change in GDP Deflator

2020 = (100 / 93.33) - 1 = 1.0715 - 1 = 0.0715 = 7.15%

2021 = (114.17 / 100) - 1 = 1.1417 - 1 = 0.1417 = 14.17%

NOTE: As per Chegg Answering Policy, 1st 4 parts have been answered.