Macroeconomics Problem Set 1

73-240 | Recitation A
Problem Set 1

Problem 1: Nominal GDP, Real GDP, Price Indices, and Inflation

A. Nominal GDP in Year 1 = $430
Nominal GDP in Year 2 = $617.50
Growth Rate of Nominal GDP = 44%

B. RGDP(1) in Year 1 = $430
RGDP(1) in Year 2 = $410
RGDP(1) growth = -4.65%

RGDP(2) in Year 1 = $655
RGDP(2) in Year 2 = $617.50
RGDP(2) growth = -5.73%

The answer differs depending on which base year you use because the relative prices of the goods in comparison to each other (price of coffee in relation to price of donuts), and thus different ratios are being worked with depending on which year you choose, meaning the answer will be different.

C. Nominal GDP in Year 1 = $430
Nominal GDP in Year 2 = $617.50
RGDP(1) in Year 1 = $430
RGDP(1) in Year 2 = $410

GDP Deflator in Year 1 = $430/$430 * 100 = 100
GDP Deflator in Year 2 = $617.50/$410 * 100 = 150.6
Rate of Inflation = 50.6%

D. CPI(1) in Year 1 = $430/$430 * 100 = 100
CPI(1) in Year 2 = $655/$430 * 100 = 152.3
CPI Based Rate of Inflation = 52.3%

E. These are different because in C what you’re measuring is the change in quantities across years, and in D you’re looking at the change in prices across the years, keeping the opposite variable constant (price and quantity respectively). CPI is a Laspeyres Index and GDP deflator is a Paasche Index. The difference is that in the Laspeyres index, consumers can afford the same bundle in the current period as they did in the base period, and in the Paasche index they could afford the same bundle in the base period as they can now.

Problem 2:

Imports(2001) = 299 [GDP = C + I + G + NX]
994 = 660 + 191 + (167 + 3) + 272 – Imports(2001)

GNP(2001) = 1002 [GNP = GDP + NFP] GNP(2001) = 994 + 8

GDP(2002) = 1044 [GDP = GNP – NFP] GDP(2002) = 1064 - 20 Changes in Inventory(2002) = 5 [GDP = C + I + G + NX] 1044 = 691 + (170 + Changes in Inventory(2002)) + 210 +273 - 305

Problem 3:

A. GDP by