W1P2 Computing GDP

Question 1

How do you calculate nominal GDP?

Answer 1

Nom GDP(t) = sum(Price(periodt) x Quantity(periodt))

Question 2

How do you work out real GDP in the current year?

Answer 2

Using the prices from the base year

Question 3

What is the formula for working out Real GDP?

Answer 3

RealGDP(t) = sum(price(base yr) * quantity(period t))

Question 4

What is the formula when calculating real GDP in the current year using prices from the base year?

Answer 4

realGDP(current) = sum(price(base yr) * quantity(current t))

Question 5

If you work out (real or nom) GDP in the base year and current year, how can you work out how much the GDP grew between the base year and current year?

Answer 5

using % change formula:
(current yr GDP - base yr GDP)/base yr GDP) * 100

Question 6

Define the GDP deflator

Answer 6

the ratio of nominal GDP to real GDP

Question 7

What is the GDP deflator formula?

Answer 7

GDP deflator = Nominal GDP / Real GDP

Question 8

If the GDP deflator works out to be 1.12, what can you infer from this?

Answer 8

the price level increased by 12% between the base year and the current year

Question 9

What does CPI measure?

Answer 9

inflation for the average consumer in the economy

Question 10

Suppose the average consumer consumes equal numbers of bags of apples and oranges, but no bananas - assume that the economy exports all bananas. How would
you construct the CPI?

Answer 10

-include equal amounts of apples and oranges into the CPI measure
-how many apples and oranges we include exactly is
not relevant here as these are the only two goods consumed - It is only
imported to include equal amounts.

Question 11

How does assuming that the bananas are exports impact the CPI calculation?

Answer 11

the bananas are ignored in the CPI calculation since they are not consumed within the economy (because they are exports!!)

Question 12

What is the CPI in the base year when we assume that equal amounts of apples and oranges are consumed and all bananas are exported?
Where pA(base)=£2 and pO(base)=£4

Answer 12

CPI(base yr) = (qA * pA(base yr)) + (qO * pO(base yr))

CPI(base) = (1bag of Apples * £2) + (1 bag of Oranges * £4))

CPI(base) = £6

Question 13

What is the CPI in the current year when we assume that equal amounts of
apples and oranges are consumed and all bananas are exported?
Where pA(current)=£3 and pO(current)=£5

Answer 13

CPI(current yr) = (qA * pA(current yr)) + (qO * pO(current yr))

CPI(current yr) = (1bag of Apples * £3) + (1 bag of Oranges * £5))

CPI(current yr) = £8

Question 14

How do you work out the change in price level measured by the CPI?

Answer 14

πCPI = (CPI current - CPI base)/CPI base)) x 100