Question

Define Gross Domestic Product. What are the components of GDP in an open economy?                                                                               [10 marks]

Assume that an economy produces only two goods; food and fuel. The below table gives price and quantity data for the economy for three years.

Year	Price of Food	Quantity of Food	Price of Fuel	Quantity of Fuel
2009	€2	200	€5	100
2010	€3	200	€5	150
2011	€4	200	€6	200

Use the information given to calculate nominal GDP for the economy in each year. [15 marks]

Using 2009 as the base year, calculate real GDP for the economy in each year.                                                                                                [15 marks]

What is the Consumer Price Index (CPI) used to measure and how is it constructed?                                                                           [20 marks]

Give two reasons why the Consumer Price Index tends to overstate the true cost of living in a country.                                                        [10 marks]

What is meant by the concept of money neutrality? When is this theory likely to hold?                                                                                                 [10 marks]

What is the Fisher Effect and how does this theory relate to the concept of money neutrality?              

Answer 1

Answer 1:

Gross domestic product(GDP) is the value of the total output produced within the domestic boundaries of an economy in a given time period. This does not differentiate between the nationality of the producer just that the activity takes place within the geographic boundaries of a country.

The main components of GDP are:

1) Private consumption Demand: this is the demand for output or the expenditure made by the households and individuals in the economy.

2) Investment: This is the expenditure made by the private firms and corporate business houses.

3) Government spending: This is the expenditure made by the government on the public sector goods such as development of infrastructure and providing social security benefits.

4) Net Exports: This exports less imports that the country demand. Positive net imports imply increase in GDP. Good for economy.

** Please post each question separately.