You are given the following information about an economy over the five-year peri

Question

You are given the following information about an economy over the five-year period 2001-2005. All GDP values are in billions of dollars, the population (pop'n) figures are in millions. Consider 2000 as a base year. 1. Year 2001 2002 2003 2004 2005 Current dollar GDP GDP Deflator 551.6 605.9 649.9 Constant dollar GDP Pop'n 101.9 103.1 102.4 101.7 102.3 104.7 114.8 118.6 121.8 553.0 566.1 563.1 674.4 A. Fill in the missing entries in the table. Show your steps B. Current-dollar GDP increased by 9.84 percent between 2001 and 2002. Calculate the percentage increases in constant-dollar (real) income and in the GDP deflator. Why doesn't the sum of the two percentages equal the percentage increase in nominal GDP? Calculate the growth rate in real GDP per capita for 2001-2002 and 2004-2005. Which of the two periods is likely to represent a recessionary phase of the economy? C.

Explanation / Answer

Answer A

Missing Entries:

Year 2001: Constant Dollar GDP = (Current Dollar GDP/GDP Deflator)*100 i.e. (551.6/104.7)*100 = 526.84

Year 2002: GDP Deflator = (Current Dollar GDP/Constant Dollar GDP)*100 i.e. (605.9/553)*100 = 109.57

Year 2004: Current Dollar GDP = (GDP Deflator*Constant Dollar GDP)/100 i.e. (118.6*563.1)/100 = 667.84

Year 2005: Constant Dollar GDP = (Current Dollar GDP/GDP Deflator)*100 i.e. (674.4/121.8)*100 = 553.69

Answer B

Percentage increase in Constant Dollar GDP (2001-2002) = ((553-526.84)/526.84)*100 = 4.97%

Percentage increase in GDP Deflator (2001-2002) = ((109.57-104.7)/104.7)*100 = 4.65%

The sum of increase in Constant Dollar GDP and GDP Deflator does not equal to increase in Current Dollar GDP because the effect of inflationary prices in current dollar GDP will double while increase in constant dollar GDP will be on the base year prices.  

Answer C

Real GDP per capita (2001) = Constant Dollar GDP (in millions)/Population = 526840/101.9 = 5170.17 Dollars

Real GDP per capita (2002) = Constant Dollar GDP (in millions)/Population = 553000/103.1 = 5363.72 Dollars

Real GDP per capita (2004) = Constant Dollar GDP (in millions)/Population = 563100/101.7 = 5536.87 Dollars

Real GDP per capita (2005) = Constant Dollar GDP (in millions)/Population = 553695/102.3 = 5412.46 Dollars

Growth Rate in Real GDP per capita (2001-2002) = ((5363.72-5170.17)/5170.17)*100 = 3.74%

Growth Rate in Real GDP per capita (2004-2005) = ((5412.46-5536.87)/5536.87)*100 = (2.25%)

As per the growth rate calculation, the period of 2004-2005 is more likely to represent a recessionary phase of economy since there has been a decline in Real GDP per capita from 2004 to 2005.

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