Problem Set 2

15/379328/EK/20388

1. Problems 1
a. Buying a new refrigerator from a domestic manufacturer will contribute to the
consumption component of GDP because a refrigerator is a good purchased by a
household.
b. Buying a new house from local builder by Aunt Jane contributes to the
investment component of GDP because a house is an investment good.
c. Buying an old Victorian house by Jackson family from the Walker family has no
contribution to the GDP component because GDP includes currently produced
goods, not goods produced in the past.
d. I pay a hairdresser for a haircut will contribute to the consumption component of
GDP because we use this service, then pay for it.
e. Ford selling a Mustang from its inventory to the Martinez family contributes to
the investment components of GDP. Investment decreases because the car in
Ford’s inventory had been counted as an investment good until it was sold.
f. Ford manufactures a Focus and sells it to the car rental company will contribute to
the investment component of GDP. Investment increases for the car rental
company because new cars from Ford were bought.
g. California hires workers to repave Highway 101 contribute to the government
purchase component of GDP because the government spent money to hire
workers to provide a good to the public.
h. The federal government sends my grandmother a social security check has no
contribution to the GDP because social security include on transfer payment.
They are notss purchases of goods and services.
i. The purchase of a bottle of French wine by my parents contributes to the
consumption and net exports components of GDP. The consumption increases
because the bottle is a good purchased by a household (C), but net exports
decreases because the bottle was imported.
j. The expansion of Honda’s factory to Ohio contributes to the investment
component of GDP. Investment increases because new capital equipment and
structures were built.
2. Problems 2
 Year Real GDP Nominal GDP GDP Deflator
(in 2000 dollars) (in current dollars) (base year 2000)
1970 3,000 1,200 40
1980 5,000 3,000 60
1990 6,000 6,000 100
2000 8,000 8,000 100
2010 7,500 15,000 200
2020 10,000 30,000 300
2030 20,000 50,000 250
3. Problems 3
GDP is the market value of all final goods & services produced within a country
in a given period of time. Government purchases is all spending on the goods and
services by government at the federal, state, and local levels.
Transfer payments are not made in exchange for a currently produced goods or
services. Transfer payments may change the individual’s income, but they don’t affect
the economy’s production. Some of the transfer payments include social security
benefits, welfare aid, unemployment compensation, etc. With transfer payments,
nothing is produced. So there is no contribution to GDP.
4. Problems 4
GDP is defined as the sum of the final values of all goods and services produced
within an economy during a period (a year or a quarter). If GDP included goods that
are resold, it would be counting output of that particular year, plus sales of goods
produced in a previous year. It would double-count goods that were sold more than
once and would count goods in GDP for several years if they were produced in one
year and resold in another.
5. Problems 5
a. Calculating nominal GDP
2016= ($1 per milk × 100 milk) + ($2 per honey × 50 honey) = $200
2017= ($1 per milk × 200 milk) + ($2 per honey × 100 honey) = $400
2018= ($2 per milk × 200 milk) + ($4 per honey × 100 honey) = $800

Calculating real GDP (base year 2016)

2016= ($1 per milk × 100 milk) + ($2 per honey × 50 honey) = $200
 2017= ($1 per milk × 200 milk) + ($2 per honey × 100 honey) = $400
2018= ($1 per milk × 200 milk) + ($2 per honey × 100 honey) = $400

Calculating the GDP deflator

2016= ($200/$200) × 100 = 100
2017= ($400/$400) × 100 = 100
2018= ($800/$400) × 100 = 200

b. Calculating the percentage change in nominal GDP

Percentage change in nominal GDP in 2017= [($400 − $200)/$200] × 100 = 100%
Percentage change in nominal GDP in 2018 = [($800 − $400)/$400] × 100 = 100%

Calculating the percentage change in real GDP

Percentage change in real GDP in 2017 = [($400 − $200)/$200] × 100 = 100%
Percentage change in real GDP in 2018 = [($400 − $400)/$400] × 100 = 0%

Calculating the percentage change in GDP deflator

Percentage change in the GDP deflator in 2017 = [(100 − 100)/100] × 100 = 0%
Percentage change in the GDP deflator in 2018 = [(200 − 100)/100] × 100 = 100%

Prices did not change from 2017 to 2018. Thus, the percentage change in the GDP
deflator is zero. Likewise, output levels did not change from 2017 to 2018. This
means that the percentage change in real GDP is zero.

c. Economic well-being increase more in 2016 than in 2017, since real GDP rose in
2017 but not in 2018. In 2017, real GDP rose but prices did not. In 2018, real
GDP did not rise but prices did.