Question

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2010 Good Quantity Hot dogs 200 Hamburgers 200 2018 Price Quantity $ 2 250 $3 500 Price $4 54 c. Apple sells a computer to a bakery in Paris, France. d. Apple sells a computer to Paris Hilton. e. Apple builds a computer to be sold next year. Find data on GDP and its components and compute the percentage of GDP for the following components for 1950, 1990, and the most recent year available. a. Personal consumption expenditures b. Gross private domestic investment c. Government purchases d. Net exports e. National defense purchases f. Imports Do you see any stable relationships in the data? Do you see any trends? (Hint: You can find the data at https://www.bea.gov, which is the website of the Bureau of Economic Analysis.) 6. Work It Out. Tina is the sole owner of Tina's Lawn Mowing, Incorporated (TLM). In one year, TLM collects $1,000,000 from customers to mow their lawns. TLM's equipment depreciates in value by $125,000. TLM pays $600,000 to its workers, who pay $140,000 in taxes on this income. TLM pays $50,000 in corporate income taxes and pays Tina a dividend of $150,000. Tina pays taxes of $60,000 on this dividend income. TLM retains $75,000 of earnings in the business to finance future expansion. How much does this economic activity contribute to each of the following? a. GDP b. NNP c. National income d. Compensation of employees e. Proprietors' income f. Corporate profits g. Personal income h. Disposable personal income 7. Work It Out. Consider an economy that produces and consumes hot dogs and a. Using 2010 as the base year, compute the following statistics for each year: nominal GDP real GDP, the implicit price deflator for GDP, and the CPI. b. By what percentage did prices rise between 2010 and 2018? Give the answer for each good and also for the two measures of the overall price level. Compare the answers given by the Laspeyres and Paasche price indexes. Explain the difference. 8. Abby consumes only apples. In year 1, red apples cost $1 cach, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2.green apples cost $1, and Abby buys 10 green apples. a. Compute the CPI 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? b. Compute Abby's nominal spending on apples in each year. How does it change from year 1 to year 22 c. Using year 1 as the base year, compute Abby's real spending on apples in each year. How does it change from year 1 to year 22 d. Defining the implicit price deflator as nominal spending divided by real spending, compute the deflator for each year. How does the deflator change from year 1 to year 2? e. Suppose that Abby is equally happy eating red or green apples. How much has the true cost of living increased for Abby? Compare this answer to your answers to parts (a) and (d). What does this example tell you about Laspeyres and Paasche price indexes? 9. Work It Out. An economy has 100 people divided among the following groups: 25 have full-time jobs, 20 have one part-time job, 5 have two part-time jobs, 10 would like to work and are looking for jobs, 10 would like to work but are so discouraged they have given up looking, hamburgers. In the following table are data for two different years.

Answer 1

a) Nominal GDP takes into account the quantity and prices in the current year.
Nominal GDP in 2010,
( 200 * 2 ) + ( 200 * 3 ) = 1000
Nominal GDP in 2018,
( 250 * 4 ) + ( 500 * 4 ) = 3000

Real GDP measures the current quantities but base year prices.
Real GDP in 2018,
( 250 * 2 ) + ( 500 * 3 ) = 2000

GDP deflator = ( Nominal GDP / Real GDP ) * 100
( 3000 / 2000 ) * 100 = 150

CPI is measured by assumming a base year fixed quantity of goods with current prices.
( 200 * 2 ) + ( 200 * 3 ) = 1000
For 2018
( 200 * 4 ) + ( 200 * 4 ) = 1600
( 1600 / 1000 ) * 100 = 160

b) CPI in 2010 is assumed to 100 and it clocked 160 in 2018 from the above calculations.
( 160 / 100 ) - 1 = 0.6 or 60%
The rise in CPI is 60% between 2010 to 2018.

The price of the Hot dog was $2 in 2010 and it rose to $4 in 2018.
( 4 / 2 ) - 1 = 1 or 100%
The price of Hamburgers was $3 and it is now $4
( 4 / 3 ) - 1 = 0.33 or 33%

CPI is measured by Lespyres or Paasche Index
Lespyres Index = $\sum$ Current Prices * Base Year Quantities / $\sum$ Base Year Prices * Base Year Quantities
( 1600 / 1000 ) = 160

Paasche Index =  $\sum$ Current Prices * CurrentYear Quantities / $\sum$ Base Year Prices * Current Year Quantities
( 3000 / 2000 ) = 150

Lespyres index actually takes into account the base year quantities and that means it completely ignores the changes in consumption patterns due to income effect or technological progress. The consumption may increase and decrease from the base period because of this and the degree will vary with a longer period of time. It tends to return a number which is higher than the actual inflation.
Paasche index, on the other hand, considers current period quantities to the base year prices and it ignores the price change due to macroeconomic factors. Paasche index depicts a lower value of inflation than the actual.