ECON 209 Lecture Notes - Lecture 2: Real Interest Rate, What Lies Ahead, Nominal Interest Rate

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12 Feb 2015

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To measure total output in dollars, we add up the values of the many different goods produced: this gives nominal national income, with base-period prices, we get real national income. Quantity of apples in 2005 x price of apple in 2005 + number of oranges in 2005. + price of oranges in 2005 = national income in 2005. In 2015, i have a different amount of apples produced than in 2005. Quantity of apples in 2015 x price of apple in 2005 + number of oranges in 2015. + price of oranges in 2005 = this dollar value, if it has increased, i know that it has increase because of the production, and not the price. This kind of calculation = real national income, which we calculate at a base-period price (change the quantity, keep the price of a certain year). Canada, it is not part of the gdp. If we: the percentage growth of rate: real gdp 2005/gdp 2006.

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Annual Growth Rates of Real GDP Per Capita (in percents)
Ending Year
1929
1933	-8.2
1939	0.2
1940	0.9
1945	3.7	10.3
1950	2.4	4.1	-1.8
1955	2.4	3.6	0.4	2.7
1960	2.2	2.9	0.6	1.7	0.8
1965	2.4	3.0	1.3	2.3	2.1	3.5
1970	2.3	2.9	1.5	2.3	2.2	2.9	2.3
1975	2.3	2.7	1.5	2.2	2.0	2.4	2.0	1.6
1980	2.3	2.7	1.7	2.2	2.1	2.5	2.2	2.1	2.6
1985	2.3	2.6	1.7	2.2	2.2	2.4	2.2	2.1	2.4	2.2
1990	2.3	2.6	1.8	2.2	2.2	2.4	2.2	2.2	2.4	2.2	2.3
1995	2.2	2.5	1.7	2.1	2.1	2.3	2.1	2.0	2.1	1.9	1.8	1.3
2001	2.3	2.5	1.9	2.2	2.2	2.3	2.2	2.2	2.3	2.2	2.2	2.1	2.8
	1929	1940	1945	1950	1955	1960	1965	1970	1975	1980	1985	1990	1995
Starting Year

Source: Economic Report of the President, various years.

This table keeps changes in real GDP from being overstated by adjusting for

Select one:

a. productivity.

b. inflation.

c. standard of living.

d. population growth.

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Per Capita GDP
Luxembourg	$33,609
United States	$33,586
Switzerland	$27,126
Japan	$23,311
Iceland	$23,230

Economists use numbers such as those in the table as a measure of

Select one:

a. net exports.

b. total dollar value of all final goods and services.

c. national income.

d. standard of living.

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Per Capita GDP
Luxembourg	$33,609
United States	$33,586
Switzerland	$27,126
Japan	$23,311
Iceland	$23,230

The numbers in this table were calculated by

Select one:

a. multiplying GDP by total population.

b. dividing GDP by total population.

c. adding the dollar value of all final goods and services produced in the nation.

d. subtracting net exports from GDP.

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A key gauge of future U.S. economic activity declined 0.5% last month, as the Sept. 11 terrorist attacks in New York and Washington weakened an already troubled economy.

The Conference Board said Monday its index of leading economic indicators fell to 109.2 in September,...the largest one-month decline since January 1996.... The index indicates where the overall U.S. economy is headed in the next three to six months....

The economy had been struggling for several months before the Sept. 11 attacks. Many economists have said they believe that a recession is unavoidable with the new uncertainties raised by the disaster.

Source: âLeading Indicators Decline,â USAToday.com, October 22, 2001.

The passage discusses a business fluctuation influenced by

Select one:

a. external shock.

b. monetary factors.

c. innovation.

d. capital expenditures.

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For all the recent talk of cutting taxes, Congress rarely cuts them when the economy is growing robustly, as it is now, and unemployment is low. The worry among economists is that the extra money in peopleâs pockets may make an already strong economy too strong, finally stoking inflation after a long period of relatively stable prices.

Source: The New York Times, July 14, 1999.

The passage describes rising inflation as a possible result of

Select one:

a. a booming economy.

b. rising unemployment.

c. tax cuts.

d. a prolonged period of stable prices.

1. What component of GDP (if any) will each of the following transactions affect? Explain.
a) A family buys a new refrigerator.
b) Aunty Jane buys a new house.
c) Kina Pharma sells drugs from its inventory.
d) Emmanuel buys a pizza.
e) The government builds a new Motorway from Accrato Kumasi
f) You buy a bottle of California wine.
g) Samsung build an assembly plant in Ghana.

2. Consider an economy that produces only four types of fruit: apples, oranges, pineapples, and bananas. In the base year (2017), the production and price data were as follows:

Fruit	Quantity	Price
Apple	3,000	$2
Banana	6,000	$3
Pineapple	4,000	$1.5
Oranges	8,000	$4

In the current year (2020), the production and price data are as follows:

Fruit	Quantity	Price
Apples	4,000	$3
Banana	14,000	$2
Pineapple	7,500	$2
Orange	32,000	$5

(a) Calculate the nominal GDP in the current year and in the base year. What is the percentage increase since the base year?
(b) Calculate the real GDP in the current year and in the base year. By what percentage does real GDP increase from the base year to the current year?
(c) Find the GDP deflator for the current year and the base year. By what percentage does the price level change from the base year to the current year?
(d) Would you say that the percentage increase in nominal GDP in this economy since the base year is due more to increases in prices or increases in the physical volume of output?

3. The following information is obtained from the World Bank’s World Development Indicators on the Economy of Ghana for the year 2015:
i) GDP per capita (constant 2000 US$) - $1696.08
ii) GDP per capita (current US$) - $1381.41
ii) GDP per capita, PPP (constant 2005 International $) - $3953.21

a) What factors could account for the difference between the figures in i) and ii)

b) What factors could account for the difference between the figures in i) and iii)?

c) What factors could account for difference between the figures in ii) and iii)?

4. The following relationships hold in the economy of Matata Island:
𝐶 = 320 + 0.4(𝑌 − 𝑇)

𝐼 = 150
𝐺 = 275
𝑇 = 200
a) Explain the concepts of marginal propensity to consume (MPC) and marginal propensity to save (MPS).

b) What is the MPC for this economy?
c) Explain the concepts of the autonomous spending and tax multipliers.
d) What is the autonomous spending multiplier for this economy?
e) What is the equilibrium level of income for this economy?
f) Suppose that the full employment level of output for this economy is 4000. What sort of output gap is Matata island facing?
g) What kind of policy can the government use to close this kind of gap? Explain with the aid of a diagram.

5. a) For the purposes of assessing an economy's growth performance, which is the more important statistic: real GDP or nominal GDP? Why?
b) Why are goods and services counted in GDP at market value? Explain.
c) What is the difference between intermediate good and final good? Why is the distinction important for measuring GDP?

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1. Which of the following transactions would add to the value of the U.S. GDP?

A. A college student buys a used car.
B. A college student sells her used textbooks back to the bookstore.
C. A grocery store purchases new freezers made in the United States.

D. U.S. citizen buys a new television manufactured in Asia.

2. The growth rate of real GDP:
A. depends on which year is used as the base year.
B. depends on how quickly prices are rising.
C. is always equal to the rate of growth of nominal GDP. D. is always more than the rate of growth of nominal GDP.

3. Which statement is true about GDP?
A. GDP includes the values of all final and intermediate goods and services.
B. Only the products made by American workers are included in the calculation of the US GDP.

C. Sales of old houses and used cars are included in the calculation of GDP for the current year.

D. In the US, GDP is calculated both annually and quarterly.

4. Which statement is true about GDP growth?
A. The GDP deflator is a measure of economic growth.
B. If we want to compare GDP over time, we should always compare real GDP.
C. Most economists choose nominal GDP growth as a single indicator of economic performance.

D. The GDP deflator tells the quantity change of production.

5. Which of the following is a way to compute GDP?

A. add up the wages paid to all workers

B. add up the quantities of all final goods and services
C. add up the market value of all final goods and services

D. add up the rents paid by all tenants

6. A farmer produces oranges and sells them to Fresh Juice, which makes orange juice. The oranges produced by the farmer are called:
A. inventory goods
B. transitory goods

C. final goods
D. intermediate goods

7. Martin, a US citizen, travels to Mexico and buys a newly manufactured motorcycle there. His purchase is included in:

A. both Mexican GDP and US GDP.

B. Mexican GDP, but not in US GDP.

C. US GDP, but not in Mexican GDP.

D. neither Mexican GDP nor US GDP.

8. Which of the following is included in Singapore GDP?

A. The value of production by a Singaporean working in the US.
B. The value of production by an American working in Singapore.
C. The value of production by a Singaporean that crosses the order to work in Malaysia.

D. All of the above are correct.

9. In the equation Y = C + I + G + NX,
A. Y represents the economy's total expenditure.

B. C represents household on durable goods.
C. all of the variables are always positive numbers.

D. All of the above are correct.

10. Consumption consists of spending by households on goods and services, except

purchases of intangible services.

purchases of durable goods.

purchases of new houses.

spending on education.

11. Which of the following is included in government purchase?

A. unemployment benefits a state government pays

B. social security payments the US government makes
C. the services of a US government attorney valued at the cost of her salary

D. All of the above are correct.

12. Transfer payments are:

A. included in GDP because they represent income to individuals.
B. included in GDP because they eventually will be spent on consumption.
C. not included in GDP because they are not payments for currently produced goods or services.

D. not included in GDP because taxes will have to be raised to pay for them.

13. Net exports equal
A. exports plus imports

B. exports minus imports

C. imports minus exports

D.GDP minus imports

14. In the economy of TAMIU in 2015, exports were $200, GDP was $2000, government purchases were $200, imports were $270, and investment was $500. What was TAMIU's consumption in 2015?

A. $830

B. $1230

C. $1370

D. $1770

15. Nominal GDP will increase when

A. prices increase and output increases.
B. prices increase and output decreases.
C. prices decrease and output increases.

D. All of the above are correct.

16. Changes in real GDP reflect:

A. only changes in prices.

B. only changes in the amounts being produced.
C. both changes in prices and changes in the amounts being produced.

D. neither changes in prices nor changes in the amounts being produced.

17. Which of the following is correct?
A. Nominal GDP is always less than real GDP.

B. Nominal GDP is always greater than real GDP.
C. Nominal GDP equals real GDP in the base year.
D. Nominal GDP equals real GDP in all years but the base year.

18. The GDP deflator is the ratio of:

A. real GDP to nominal GDP.

B. real GDP to the inflation rate.
C. real GDP to nominal GDP.
D. nominal GDP to the inflation rate.

19. In 2012 the nominal GDP was $18 billion and the GDP deflator was 120, what was real GDP?
A. $6.7 billion
B. $10 billion

C. $40 billion D. $100 billion

20. In the base year, the GDP deflator is always equal to A. -1
B. 0
C. 2

D. 1

21. GDP does not reflect:

A. the value of leisure.

B. the value of goods and services produced at home.

C. the quality of the environment.
D. All of the above are correct.

22. When economists talk about growth in the economy, they measure that growth as the:

A. absolute change in nominal GDP from one period to another.

B. percentage change in nominal GDP from one period to another.

C. absolute change in real GDP from one period to another.
D. percentage change in real GDP from one period to another.

23. The term economists use to describe a situation in which the economyâs overall price level is rising is:

A. economic growth

B. inflation
C. recession
D. business cycles

Use information from the Bureau of Economic Analysis (BEA) website, http://www.bea.gov/, answer question 24 and 25.

24. What is the real GDP growth rate in the 4th quarter of 2015 for the United States?

A. 1%
B. 2%
C. 3%

D. 4%

25. What is the value of real GDP in 1998 for the United States?

A. $11525.9 billion

B. $9089.2 billion

C. $11321.2 billion

D. $8889.7 billion

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ECON 209 Lecture Notes - Lecture 2: Real Interest Rate, What Lies Ahead, Nominal Interest Rate

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