Question

Portland is an economy comprised of only of a restaurant named Gloria’s Kitchen (GK) owned and run by Gloria. In one year, the yearly sale revenue of GK is $1,000,000. GK pays $600,000 to its employees, who pay $140,000 in taxes on this income. GK’s equipment depreciates in value by $125,000. GK pays $50,000 in corporate income taxes and pays Gloria a dividend of $150,000. Gloria pays taxes of $60,000 on this dividend income. GK retains $75,000 of earnings in the business to finance future expansion.

1. How much does this economic activity contribute to each of the following?

GDP, NNP ( net national product), National income, Compensation of employees, Proprietors’ income, Corporate profits, Personal income, and Disposable personal income.

2. Now consider an economy that produces and consumes coconuts and apples. In the following table are data for two different years.

Goods/Years	2010		2015
	Quantity	Price	Quantity	Price
Coconuts	200	$2	250	$4
Apples	200	$3	500	$4

Using 2010 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the implicit price deflator for GDP, and a fixed-weight price index such as the CPI.

                 

c- Now suppose, Gloria consumes only apples. In year 1 (2010) red apples cost $1 each and green apples cost $2 each, and she buys 10 red apples. In year 2 (2015), red apples cost $2, and green apples cost 1$ each, and she buys 10 green apples. Compute a consumer price index for apples for each year. Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2? Compute the deflator for each year. How does the deflator change from year 1 to year 2?

Answer 1

B. Nominal GDP =sum of current year price× current year quantity of all goods

2010 = 200×2 +200×3

2015 =250×4 +500×4

Real GDP = sum of the base year price × current year quantity of all goods

2010= 200×2 + 200×3

2015 = 250×3 + 500×3

GDP deflator = Nominal GDP/Real GDP ×100

CPI as question C.

Answer to queation number C.