Exercise 3 (21 points) Assume an economy in which only apples and oranges are pr
ID: 1135804 • Letter: E
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Exercise 3 (21 points) Assume an economy in which only apples and oranges are produced. In year 1, 500 million pounds of apples are produced and consumed and its price is $0.50 per pound, while 300 million pounds of oranges are produced and consumed and its price is $0.80 per pound. In year 2, 400 million pounds of apples are produced and consumed and its price is $0.60 per pound, while 350 million pounds of oranges are produced and its price is $0.85 per pound. (a) Using year 1 as the base year, calculate the GDP price deflator in years 1 and 2, and calculate the rate of price change between years 1 and 2 from the GDP price deflator (b)Calulate the growth rates of the nominal and real GDP (using different base years). Why do you obtain different results in the real GDP growth rate with different base years? ExplainExplanation / Answer
Product Approach
Parts and components manufacturers has sold 45,000 units to tablet manufacturer for $100 per unit and kept 5,000 units as inventory.
No intermediate inputs are used by the parts and component manufacturer.
Value added = Sales + Closing stock - Intermediate consumption
Value added = (45,000 * $100) + (5,000 * $100) - $0
Value added = $4,500,000 + $500,000 - $0
Value added = $5,000,000
The value added by the parts and component manufacturer is $5,000,000.
Tablet manufacturer has produced 25,000 tablets and has sold them to consumers at $800 per unit.
Tablet manufacturer has purchased the 45,000 units from parts and component manufacturer for $100 per unit.
Value added = Sales - Intermediate consumption
Value added = (25,000 * $800) - (45,000 * $100)
Value added = $20,000,000 - $4,500,000 = $15,500,000
The value added by tablet manufacturer is $15,500,000
GDP = Value added by parts and component manufacturer + Value added by tablet manufacturer
GDP = $5,000,000 + $15,500,000 = $20,500,000
The GDP for this economy for the year using the product approach is $20,500,000.
Expenditure Approach
25,000 tablets are purchased by the consumers for $800 per unit.
Consumption expenditure = 25,000 * $800 = $20,000,000
Parts and components manufacturer has kept a inventory of 5,000 units.
Investment = 5,000 * $100 = $500,000
GDP = Consumption expenditure + Investment = $20,000,000 + $500,000 = $20,500,000
The GDP of this economy for the year using the expenditure approach is $20,500,000.
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