Hard copies of your answers are due at the beginning of your section, either on
Thursday, November 10, or Friday, November 11. For example, if your section
starts at 10:00am on Friday, you should submit your answers to your TA in your
section classroom at 10:00am on Friday, November 11. Late problems earn zero
points.
Note: you can work on these problems or your own, or in a small group with
other current Econ 1 students. If you choose to work in a group, each student
needs to hand in a separate, individual copy to his/her TA.
(a) We calculate nominal GDP for 2001 by multiplying the value and the quantity
for each good and then summing over the goods: ($2.50 x 1,000) + ($1.25 x
500) + ($100.00 x 10) = $2,500 + $625 + $1,000 = $4,125.
We calculate nominal GDP for 2002 in the same way: ($3.50 x 800) + ($2.25
x 400) + ($100.00 x 14) = $2,800 + $900 + $1,400 = $5,100.
A geometric average can be used. The geometric average is the square root of
the product of the two numbers: (0.0545 × 0.0933) = 7.13 . Therefore, using
a geometric average, the percent change in real GDP is equal to – 7.13%.
(d) In part (a) we found that 2002 nominal GDP is $5,100. We are given that
2001 is the base year, so we can find 2002 real GDP using 2001 prices and
2002 quantities. From part (b) we found 2002 real GDP using 2001 prices to
be $3,900. The 2002 deflator is found by dividing 2002 nominal GDP by
$5,100
2002 real GDP: = 1.31
$3,900
Alternate Answer 1: We are given that the GDP deflator for 2001 is equal to
1.0. This means that 2001 nominal GDP is equal to 2001 real GDP. In (c) we
found that real GDP declined by 7.39 % (using a simple average). Therefore,
2002 real GDP is equal to (1-.0739) x $4,125 = $3,820. The 2002 deflator is
$5,100
found by dividing 2002 nominal GDP by 2002 real GDP: = 1.34
$3,820
Alternate Answer 2: We are given that the GDP deflator for 2001 is equal to
1.0. This means that 2001 nominal GDP is equal to 2001 real GDP. In (c) we
found that real GDP declined by 7.13 % (using a geometric average).
Therefore, 2002 real GDP is equal to (1-.0713) x $4,125 = $3,820. The 2002
deflator is found by dividing 2002 nominal GDP by 2002 real GDP:
$5,100
= 1.33
$3,830
National Saving = 26
Investment + Net Exports = I + X = (27– 5) + 4 = 26