Ch 22 Study Guide Practice Problem #1

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# Ch 22 Study Guide Practice Problem #1 - PowerPoint PPT Presentation

Ch 22 Study Guide Practice Problem #1. \$5140. \$3127. \$913. 1b. Largest expenditure component of GDP? Consumption C. does investment include the purchase of stocks and bonds? Why? No, they are financial transactions. There is no production of goods or services

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1b. Largest expenditure component of GDP?

• Consumption
• C. does investment include the purchase of stocks and bonds? Why?
• No, they are financial transactions. There is no production of goods or services
• D. Do government purchases include government spending on unemployment checks? Why?
• No – considered transfer payments. No production or exchange of goods/services
• E. What does it mean when NX are negative?
• The country imports more goods than it exports
• NX = X-M ….so if –NX , then M>X
Practice Problem #2

Year Production of X Price X

2000 20 \$5

2001 20 \$10

2002 20 \$20

a. Nominal GDP (P x Q) b. Real GDP (current year Q x base yr P)

• \$100 2000 \$100
• \$200 2001 \$100
• \$400 2002 \$100
Economic Growth?
• What does it tell us when NGDP increases?
• Could be increase in production
• Could be increase in price
• Could be combination of production and price
• What does it tell us when RGDP increases?
• …b/c P is held constant to base year
• ….increase is due to increase in Q
• ….= ECONOMIC GROWTH

Year Production of X Price X

2000 20 \$5

2001 20 \$10

2002 20 \$20

Nominal GDP (P x Q) Real GDP (current year Q x base yr P)

• \$100 2000 \$100
• \$200 2001 \$100
• \$400 2002 \$100

Conclusions??? Economic growth? Price Levels?

There was no economic growth.

There was only an increase in price level

#3

a. \$700

b. \$700

Year P soda Q soda P jeans Q jeans NGDP RGDP

2000 \$1 200 \$10 50

• \$1 220 \$11 50

Mistake – avoid looking at each individual good – remember this is a model for the entire economy

ex of wrong answer: conclude the economy grew for soda but not for jeans……this does not make sense

e. Value of GDP Deflator in 2000?

NGDP / RGDP x 100 : always 100 in base year

f. Value of GDP Deflator in 2001?

770/720 x 100 = 107

GDP = \$\$\$\$\$\$ Deflator is NOT \$\$ nor %% …IS index based on 100

c. \$770

d. \$720

• Compare GDP deflators – measure the change in price level
• 2nd -1st / 1st
• 107-100/100 = 7%
• h. was the increase in NGDP from 2000-01 mostly due to an increase in real output or prices?
• NGDP rose from \$700 to \$770 = 10% increase
• Increase in real output = RGDP
• 2000=\$700 2001 = \$720 2.85% (3%)
• Increase in prices = Deflator = 7%
• Conclude – 10%increase in NGDP was MOSTLY due prices (7%) vs. output (3%)
Evaluate
• Was there economic growth?
• Yes …
• RGDP…. Or
• Real output…. Or
• ……the economy …….
• Grew at a 3% rate
• The growth rate of the economy was 3%

….”normal growth” = 3% per year – long term trend since the 1950’s

………but………
• Price level or inflation increased by 7%
• …..not good to have inflation outpace production
• “normal” inflation is 1%-2%
#4 Complete Table

\$100

Year NGDP RGDP GDP Deflator

1. ----- \$100 100

2. \$120 ---- 120

• \$150 \$125 ----

Year 1 Math: Nom/Real x 100 = Deflator…\$x / \$100 x 100 = 100 = NGDP = \$100

Year 2 Math: \$120 /\$x x100 = 120 RGDP = 100

Year 3 Math: \$150/\$125 x 100 = 120

• What is base year? How can you tell ?

If Nom and Real are always same in base year, then GDP Deflator will always be 100 in the base year…..so year 1 is base year

\$100

120

\$100

Year NGDP RGDP GDP Deflator

1. ----- \$100 100

2. \$120 ---- 120

• \$150 \$125 ----

b. From year 1 to year 2, did real output rise or did prices rise? Explain

The change from year 1 to 2 was due to price rising.

The Nom and Deflator rose 20% but Real did not change at all ..indicating no change in output(RGDP measures growth in output) …so prices rose by 20%

c. From year 2 to year 3, did real output rise or did prices rise? Explain

The change from year 2 to 3 was due to output rising .

The Nom and Real both increased by 25% but the Deflator did not change….indicating no change in price….so output rose by 25%

\$100

120

Year NGDP RGDP GDP Deflator

1. ----- \$100 100

2. \$120 ---- 120

• \$150 \$125 ----

\$100

\$100

120

BONUS: Evaluate the growth of this economy from year 1 to year 3

The economy grew by 25% (based on RGDP) ….

…but prices also grew by 20% (based on the deflator)