EC140 Study Guide - Final Guide: Diminishing Returns, Output Gap, Gdp Deflator
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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?
