3. 125 marks] Using the information below on the production of goods in Bongolon

Question

3. 125 marks] Using the information below on the production of goods in Bongolongo, calculate and explain the following: a. Nominal and Real GDP for each year. b. If only 1/3 of all lego produced in Bongolongo was sold in Bongolongo and the remainder exported to other countries -how does this change your answer to (a). Explain. Year of Price Q of PriceQof PriceQ of Price Qof Price shirts ofshorts per milk per apples per kg lego per lego pack shirts short ! (litres) | litre ! () | apples milk 2014 25 $34 15 $32 200 $2.50 320 $3.50 65$8.50 2015 32 $34 25 $30 220 $2.00 400 $3.50 60 $12 2016 32$40.50 36 $35 230 $3.00 420 $3.00 55 $15 The average person in Bongolongo consumes 6 shirts, 4 pairs of shorts, 20L of milk, 7kg of apples and pack of lego each year. This is unchanged over the 3 years. What is the CPl for each year? Explain. c. d. Is the standard of living/prosperity of the economy increasing over time? Explain your answer. e. We know GDP doesn't give the best indicator of a country's level of prosperity. Why not? What other (one) indicator would you choose to look at? Explain your answer.

Explanation / Answer

a).

Here the “Nominal GDP” measure the market value of all goods and services produces with respect to current price by an entire country as whole in a particular year. Similarly, “Real GDP” measure the market value of all goods and services produces with respect to base price by an entire country as whole in a particular year.

So, here the nominal GDP for each years are given below.

For 2014: 25*34 + 15*32 + 200*2.5 + 320*3.5 + 65*8.5 = $3,502.5.

For 2015: 32*34 + 25*30 + 220*2 + 400*3.5 + 60*12 = $4398.

For 2016: 32*40.5 + 36*35 + 230*3 + 420*3 + 55*15 = $5,331.

Now, the “Real GDP” in each year is given by.

For 2014: 25*34 + 15*32 + 200*2.5 + 320*3.5 + 65*8.5 = $3,502.5.

For 2015: 32*34 + 25*32 + 220*2.5 + 400*3.5 + 60*8.5 = $4348.

For 2016: 32*34 + 36*32 + 230*2.5 + 420*3.5 + 55*8.5 = $4,752.5.

b).

Now, if “1/3 of all lego produced in Bongolongo” was sold in Bongolongo and the remainder exported to other country then the “Nominal and Real GDP” will remain same as before. Since, the GDP measure the market value of all goods and services produce within the country. So, here even if the country will engaged in export the market value of the total production will not change, => “Nominal and Real GDP” will remain same.

c).

So, here given information in “c”, the “CPI” is given by as follows.

=> CPI = [summation (Pn*q0) / summation (P0*q0)]*100, where “Pn = current price” and “P0 = base price” and “q0 = base quantity”.

So, here the value of goods and services in 2014 is given by.

=> 34*6 + 32*4 + 2.5*20 + 3.5*7 + 8.5*1 = 415.

Now, here the value of goods and services in 2015 is given by.

=> 34*6 + 30*4 + 2*20 + 3.5*7 + 12*1 = 400.5.

Finally, here the value of goods and services in 2016 is given by.

=> 40.5*6 + 35*4 + 3*20 + 3*7 + 15*1 = 479.

So, CPI for 2014 is given by “(415/415)*100 = 100”.

Now, CPI for 2015 is given by “(400.5/415)*100 = 96.5”.

Finally, CPI for 2016 is given by “(479/415)*100 = 115.42”.

d).

So, here we can see that initially “CPI” decreases from 2014 to 2015 and then it increases from 2015 to 2016, => initially the standard of living decreases than increases.

e).

As we know that GDP only measure the market value of goods and services produced by the country as a whole in a particular year. It does not measure the health of the citizen of the country, the quality of education, the distribution of income etc.

So, here a more better measure compare to “GDP” is “Real per capital income” of a country as a whole. It is given by the ratio of “Real GDP” to total population of a country.

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