Question

1- Suppose an individual receives $1000 per month in Social Security and the CPI rises by 2%. With indexation, what happens to the nominal payment and the real payment the following year?

2- The Radio Shack commercial from 1989 showed a cell phone that was sale priced at $799. What type(s) of problems with measuring consumer prices is illustrated by the cell phone example? Explain.

3- The Indicator from Planet Money reported that GDP fell by 32.9% in the second quarter of 2020. What value from the GDP calculations are they using to measure the growth rate? Did the economy really shrink by 32.9% in 3 months? Explain.

4- Suppose a winery purchases $25,000 of new barrels in 2020 to age the wine produced this year. They produce $80,000 worth of wine, sell $45,000 to households, export $15,000, and keep the rest in barrels to sell in 5 years after longer aging. How do each of these transactions affect total GDP and how is each counted in the components of GDP?

Answer 1

1.The nominal payment remains the same while the real payment reduced(Divide the nominal amount by the deflator-1.02). The real payment will hence be reduced.

2.Some of the problems with measuring consumer prices back then was the inablity to measure willingnes to pay, value for money and the expected potential market size since they did not price their good based on demand but rather expected the good to generate it's own hype and demand.

3. Annualized GDP growth rate is a measure of the change in GDP from one year to the next year. Annualized GDP growth rate is a way of knowing whether the general economy is getting better, worse or staying stable over time. The gross domestic product from April to June did plunge 32.9% but it did so on an annualized basis which means that it fell 32.9 percent as compared to the same quarter last year.From an actual contractionary perspective, the second quarter decline in GDP around 1.8%.

4. The purchase of new barrels increases the consumption component of GDP.

Selling 45000 dollars worth of wine to households increases the GDP by an undetermined amount basis the number of barrels they use and the other production costs associated with wine.

Exporting 15000 dollars worth of wine increases the export component of GDP.

The rest does not immediately affect GDP but can be considered to be an investment.