Question

a.) Define GDP.

b.) What are three reasons why GDP in the United States has increased over time?

c.) Consider a country with a simple economy that produces two goods: apples and bananas. Data is collected in two years: 2016 and 2017.

2016:

Price of Apples: $2 Quantity of Apples: 10

Price of Bananas: $3 Quantity of Bananas: $20

2017:

Price of Apples: $4 Quantity of Apples: $30

Price of Bananas: $6 Quantity of Apples: $60

Complete nominal GDP in this country in 2016 and 2017.

d.) Using the data from c.), compute real GDP in 2016 and 2017 using 2016 as the base year.

e.) Using your answers from c.) and d.), compute the GDP price deflator for 2016 and 2017.

f.) Compute the growth rate of real GDP between 2016 and 2017.

Answer 1

a) GDP is defined as the sum of all final goods and services produced in an economy in a given year.It does not include goods which are used in production as a raw material or those goods which are being resold and only calculates the values of the final goods produced during the current year.

GDP is the sum of C+I+G+NX

where C=connsumption, I=Investment, G=government spending, NX=net exports

b) Reasons why the GDP in US has increased over time:

- The investment in the capital has increased in the US over the time-as US has emerged as a top destination for investment because of its stable economic and political environment over time and it also has a good supply of resources needed for production. The presence of a sound financial environment stabilizes the economy and a strong dollar attracts more investors to the country.

-The increase in the labor force and its productivity has led to an increase in the growth of real output over time. The labor force is technically skilled which has led to specialization of the labor which improves prodcutivity.

- The presence of big multinationals has ensured that the goods produced in the country have a huge demand all over the world which promotes economies of scale as the goods are produced at a lower cost of production without sacrificing the quality.

c) Nominal GDP in 2016:

$2*10+$3*20 = $80

Nominal GDP in 2017:

$4*30+$6*60 = $480