Question

1. In 1980 France had a GDP of $325 billion francs and a population of 11.78 million. In 1980 the exchange rate was 1 US dollar was equal to 1.67 francs. In 2010, France had a GDP of $435 billion euros and a population of 21.75 million. In 2010 0.8 euros was equal to 1 US Dollar. The GDP deflator was 51 in 1980 and 125 in 2010. By what percentage did France’s Real GDP per capita rise between 1980 and 2010 in U.S. dollars?

2. Identify the most commonly cited measure of inflation in the United States and explain how it is calculated. Identify and briefly discuss the some of the problems that statisticians have paid considerable attention to in recent years (your answer needs to be thorough).

3. Describe the relationship between inflation levels in prices and inflation levels for prices, wages and interest rates with respect to their ability to affect people's economic status and business outcomes (again, here be thorough and explain what happens when wages, etc. does and does not keep up with inflation).

4. Explain the differences and similarities between the GDP deflator and the CPI. Be thorough in your answer and write in complete sentences.

5. What is Hyperinflation and what are some reasons it may occur and persist? What is deflation, when does deflation usually occur, and is deflation a good or bad thing? Give examples of when each scenario happened in history as well. Again, be thorough in your answer.

6. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 15 hot dogs and 8 hamburgers. A hot dog cost $2.25 in 2006 and $5.40 in 2007. A hamburger cost $5.75 in 2006 and $7.86 in 2007. Calculate the CPI for both years and then find the inflation rate.

7. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 25 sandwiches and 40 magazines. In 2006, a sandwich cost $4.50 and a magazine cost $3.99. In 2007, a sandwich cost $5.75. If the inflation rate in 2007 was 21 percent, then how much did a magazine cost in 2007?

8. When Anders took out his first two-year membership with Maxima Gym in 2004, the fee was $525.00. He renewed his membership three times; in 2006 for $580.00, in 2008, for $600.00, and again in 2010, for $699.00. What is the OVERALL rate of inflation for Anders' gym membership?

9. In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the courthouse for about $2.4 million. A price index for nonresidential construction was 12 in 1949, 96 in 1987, and 117.5 in 2000. Calculate the value of the courthouse in 2000 dollars and the value of the hospital in 2000 dollars and compare your answers. Which one cost more?

10. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 156 in 2001 and 227.25 in 2006. What is Ruben's 2006 salary in 2001 dollars? What does this mean about how his purchasing power increased or decreased?

Answer 1

Real GDP = (Nominal GDP ÷ GDP Deflator)

GDP Deflator in 1980 = 51

GDP of France in 1980 = 55 billion euros

Real GDP of France in 1980 = (55,000,000,000 ÷ 51) × 100 = 1,078,431,372.55 euros

GDP Deflator in 1980 = 125

GDP of France in 1980 = 235 billion euros

Real GDP of France in 1980 = (235,000,000,000 ÷ 51) × 100 = 1,880,000,000.00 euros

Exchange rate in 1980: 1 US Dollar = 0.8 Euros or 1 Euro = 1.25 US Dollar

So, GDP of France in 1980 in US Dollar = 1,078,431,372.55 × 1.25

GDP of France in 1980 in US Dollar = $1,348,039,215.69

Exchange rate in 1980: 0.8 US Dollar = 1 Euros or 1 US Dollar = 1.25 Euro

So, GDP of France in 1980 in US Dollar = 1,880,000,000 ÷ 1.25

GDP of France in 1980 in US Dollar = $1,504,000,000.00

Population of France in 1980 = 10,800,000

Population of France in 2000 = 15,300,000

Real GDP per capita of France in 1980 in US Dollars = 1,348,039,215.69/10,800,000 = $124.81

Real GDP per capita of France in 2000 in US Dollars = 1,504,000,000.00/15,300,000 = $98.3

Compound Annual Growth Rate (CAGR) = (GDP in 2000 ÷ GDP in 1980)1/N-1 – 1

N = Number of Years

CAGR = (98.3 ÷ 124.81)1/20 – 1

CAGR = –1.2%