Each part is 10 points A) nGDP is $5 trillion in Yr 1 and $5.4 trillion one year

ID: 1147167 • Letter: E

Question

Each part is 10 points

A) nGDP is $5 trillion in Yr 1 and $5.4 trillion one year later. What is the GDP growth rate?

B) If rGDP in Yr 1 was also $5 trillion what can you say about Yr1?

C) If rGDP grew 5% between Yr. 1 and Yr. 2 what did GDP prices do?

(Hint: use part A. If you know GDP growth with both output and prices and now you now output by itself, what must prices have done?).

Determine whether GDP will be underestimated or overestimated in each of the following:

(5 points each)

The quality of goods is declining.

Production is accompanied by significant spillover costs.

The government produces valuable goods and services at a low cost.

The cost of living is lower in the country than is typical in the world.

A) Given that nominal GDP is $5 trillion in Yr 1 which increases to $5.4 trillion one year later. Find the GDP growth rate gr

5.4 T = 5 T (1 + gr)^1

gr = 1.08 - 1 = 8%. Hence growth rate of GDP is 8%.

B) If rGDP in Yr 1 was also $5 trillion we see that nominal and real GDP are same in Yr1 and so it is the base year.

C) If rGDP grew 5% between Yr. 1 and Yr. 2, then it implies that we have a situation of inflation. We know that

growth rate of nominal GDP - growth rate of real GDP = growth rate of price level.

8% - 5% = 3%

Hence the GDP prices increase by 3%.

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