ECON 2400 Lecture Notes - Lecture 19: Government Budget Balance

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amaranthhamster412

20 Apr 2017

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Problems with measuring real gdp and the price level. The implicit gdp price deflator is derived, the measurement of real gdp and the measurement of the price level are intimately related. If a particular measure of real gdp underestimates growth in real gdp, then the rate of inflation is overestimated. In practice, there are three important problems with measuring real gdp and the price level. The first problem was mentioned above, which is that relative prices change over time. How chain-weighting corrects for this problem in the measurement of real gdp and, therefore, corrects for the bias that relative price changes would introduce in the measurement of inflation using the implicit gdp price deflator. Changes in relative prices can also introduce severe bias in how the cpi measures inflation. When there is a relative price change, consumers typically purchase less of the goods that have become more expensive and more of those that have become relatively cheap.

Related Questions

Suppose that the are two goods in the economy, Xylophones (X) and Yams (Y). In year t, consumers in the economy purchase 20 Xylophones at a price of $20 each and 100 Yams at a price of $2 each. In year t + 1, consumers in the economy purchase 18 Xylophones at a price of $30 each and 150 Yams at a price of $2.50 each.

1. Calculate the GDP deflator in years t and t + 1 with base year t. What is inflation according to this deflator? Show each step. (Hint: it will be helpful for you to first calculate nominal and real GDP in years t and t + 1. When you calculate real GDP, make sure that you use the appropriate base year).

2. Calculate the GDP deflator in years t and t + 1 with base year t + 1. What is inflation according to this deflator? Show each step. (Hint: you will need to calculate real GDP in years t and t + 1 using a different base year than you used in part 1. Once you calculate real GDP with the appropriate base year, you will follow the same steps that you did in part 1.)

3. Compare your answers to a and b above. Are they the same? If not, why not? How does chain-weighting address any potential difference?

4. Calculate the CPI in years t and t + 1, using year t as the base year.

5. Describe two ways in which the CPI differs from the GDP deflator.

6. There are several problems with using the CPI to calculate real GDP and measure growth. One of these problems is that the CPI does not account for changes in the quality of goods sold over time. A computer today is significantly more efficient than it was even just ten years ago, so even if the price of computers rise with inflation, you are getting significantly more computing power per dollar. How would this bias estimates of GDP growth and inflation?

1. Consider an economy that produces oranges and boomerangs. The prices and quantities of these goods in two different years are reported in the table below. Fill in the missing entries

	2016	2017	% change of 2016-2017
quantity of oranges	100	105	?
quantity of boomerangs	20	22	?
price of oranges (dollars)	1	1.10	?
price of bommerangs (dollars	3	3.10	?
Nominal GDP	?	?	?
Real GDP in 2016 prices	?	?	?
Real GDP in 2017 prices	?	?	?
Real GDP in chained prices	?	?	?

2. Consider the economy from the above problem 1.^ Calculate the inflation rate for the 2016â2017 period using the GDP
deflator based on the Laspeyres, Paasche, and chain-weighted indexes of GDP.

3. Indian GDP in 2010 was 78.9 trillion rupees, while U.S. GDP was $14.5 trillion. The exchange rate in 2010 was 45.7 rupees per dollar. India turns out to have lower prices than the United States (this is true more generally for poor countries): the price level in India (converted to dollars) divided by the price level in the United States was 0.368 in 2010.
(a) What is the ratio of Indian GDP to U.S. GDP if we donât take into account the differences in relative prices and simply use the exchange rate to make the conversion?
(b) What is the ratio of real GDP in India to real GDP in the United States in common prices?
(c) Why are these two numbers different?

pinkseal478

Real versus nominal GDP

Consider a simple economy that produces two goods: apples and oranges. The following table shows the prices and quantities for the goods over a three-year period.

Year	Apples		Oranges
	Price	Quantity	Price	Quantity
	(Dollars per apple)	(Number of apples)	(Dollars per orange)	(Number of oranges)
2010	1	120	1	195
2011	2	130	4	195
2012	4	130	4	145

A. Use the information from the previous table to fill in the following table.

Year	Nominal GDP	Real GDP	GDP Deflator
Year	(Dollars)	(Base year 2010, Dollars)	GDP Deflator
2010
2011
2012

B. From 2011 to 2012, change in nominal GDP is __________, and real GDP is ________.

C. The inflation rate in 2012 was ____________.

D. Why is real GDP a more accurate measure of an economy's production than nominal GDP?

a. Real GDP does not include the value of intermediate goods and services, but nominal GDP does.

b. Real GDP includes the value of exports, but nominal GDP does not.

c. Real GDP is not influenced by price changes, but nominal GDP is.

lilacpig169

ECON 2400 Lecture Notes - Lecture 19: Government Budget Balance

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