6. You are given the following information about the country, Party Land. Year 2
ID: 1104309 • Letter: 6
Question
6. You are given the following information about the country, Party Land. Year 2003 2004 Nominal GDP CPI $1 million $1.5 milion Real GDP Per Capita Population 1,000 1,500 Real GDP 100 105 (a) Calculate the missing column for real GDP for 2003 and 2004. (b) Calculate the missing column for the standard of living or real GDP per capita for 2003-2004. (c) What is the base year for the economy? How did you identify this? (d) Using (e) How did the standard of living for the citizens of Party Land change from 2003 to 2004? the base year you identified in part C, what is the inflation rate for 2003-2004? (f) Why do we calculate the standard of living with real GDP per capital rather than using nominal GDP per capita?Explanation / Answer
A) Real GDP 2003 is same as nominal GDP 2003 because CPI is 100. Real GDP 2004 = 1.5*100/105 = 1.1428 million
B) Real GDP per capita in 2003 = 1000000/1000 = $1000. In 2004, it falls to 1428571/1500 = $952.38
C) Base year is the year in which price index is 100. This is 2003 in this case
D) Inflation rate = (105 - 100)/100 = 5%
E) It has fallen because real GDP per capita has fallen down.
F) Because it represents actual cost of living in a particular area and the actual distributionary effect of GDP
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