Question

This exercise deals with the difference between nominal and real GDP, and also explores the characteristics of the components of GDP over time.

Show all work and formulas

Instructions

• Go to BEA.gov and in the U.S. Economic Accounts find Table 1.1.5 (nominal GDP) and Table 1.1.6 (real GDP) and download them for the period 1960 to the latest available year in annual frequency (yearly).

• In Excel plot line 1 of both tables within a single graph. Where do they cross? Explain what is the relationship between real and nominal GDP before and after the crossing point? Why? (25 points)

• In Excel, using the formula “=ln( )” take the natural log of real GDP (line 1) and plot the change in GDP from one year to the next measured by ln(GDP(t)) - ln(GDP(t-1)). (If you multiply by 100, it will be a percentage.) (25 points)

• In Excel using nominal GDP (table 1.1.5) calculate and plot the GDP shares of Consumption (line 2), Investment (line 7), Government (line 22), and Net Exports (line 15). For example, the consumption share is C/Y or line 2 / line 1. (25 points)

• Explain the relationship between national saving and net exports. (25 points)

All the charts should have a title and have the axis labeled (with time in the x-axis, and the label of the variable(s) and units in the y-axis).

Answer 1

The three graphs are shown below

Real vs Nominal GDP-

GDP Change-

Share in GDP-

Before crossing, the real GDP is higher than the nominal GDP, meaning the standard of living and purchasing power of the US consumers was higher than as shown in nominal GDP. Post crossing, its reverse. Now the purchasing power of the US consumers is lower than as shown in nominal GDP.

The difference between the national saving and the investment is equal to the net exports:

S-I=NX.