Question

Economics Chapter 5

6.) During the manufacture of a computer, the manufacturer of components sell the components to an Assembler for $150; the Assembler sells an assembled computer to the wholesaler for $375; the wholesaler sells the computer to the retailer for $500, and the retailer sells the computer to the customer for $750. What is the value of the computer in GDP? Explain

7.) Calculate the following and show the Calculations : (a) Nominal GDP in 2017 and 2018 (b) Real GDP in 2017 and 2018, using 2017 as the base year (c) GDP deflator in 2017 and 2018 (d) Inflation rate in 2018

	Price of Milk	Quantity of Milk (quarts)	Price of Cookies	Quantity of Cookies (boxes)
2017	$1.50	300	$4.50	125
2018	$2.50	275	$5.50	150

Answer 1

6) While calculating GDP using the value-added method, we will exclude the cost of intermediate goods and include only the value added during the process.

Value added at each stage is as follows:

the manufacturer of components sell the components to an Assembler for $150, so value added = $150

the Assembler sells an assembled computer to the wholesaler for $375; value added = 375-150=$225

the wholesaler sells the computer to the retailer for $500, value-added = 500-375=125

and the retailer sells the computer to the customer for $750, value-added = 750-500=250

Total value added by the computer to the GDP = 150+225+125+250 = $750

7)

	Price of Milk	Quantity of Milk (quarts)	Price of Cookies	Quantity of Cookies (boxes)
2017	$1.50	300	$4.50	125
2018	$2.50	275	$5.50	150

a) Nominal GDP = current year price*current year quantity

2017 = 1.50*300+4.50*125 =1012.5

2018 = 2.50*275+5.50*150 = 1512.5

b) Real GDP = base year prices*current year quantity

As base year is 2017

2017 = will be same as nominal GDP =1012.5

2018 = 1.50*275+4.50*150 = 1087.5

c) GDP Deflator = Nominal GDP/Real GDP*100

2017 = 1012.5/1012.5*100 =100

2018 = 1512.5/1087.5*100 = 139

d) Inflation rate in 2018= 139-100/100*100 = 39%