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University of Massachusetts Amherst
ECON 104
Valerie Voorheiis

Worksheet 2: GDP, Inflation and the Origins of Macroeconomics 1. What are the important dates and issues that started the modern study of macroeconomics? -1929: The stock market crash and the beginning of the great depression -1939: The beginning of World War II, depression lessens -1946: The end of World War II and the beginning of the “Pax Americana” -1970s: The decline of the economy resulting from the oil embargo of ’73 and wage stagnation -1981: Stock market crash leading into a deep recession -1987: “Black Monday” stock market crash, Dow Jones dropping by 22% 2. What is the difference between real and nominal GDP? Why is this important? With real GDP, inflation and other variables have been accounted for and factored into the GDP; whereas with nominal GDP the inflation rates have not been taken into account. This is important because without taking inflation into account, we do not know the actual value of the growth rate for that particular time, as the figure will have been skewed by the lack of inflation. 3. What is the Consumer Price Index? What was the inflation rate for the month of August 2013? (check out www.bls.gov) What was it for the previous 12 months? Name 2 ways the CPI is used. The Consumer Price Index is a program that produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services (bls.gov/CPI) The inflation rate for August 2013 was +0.1% change. For the previous 12 months, the inflation rate was +1.5% (before seasonal adjustment) The CPI is used to track the inflation of household goods and services such as food and energy. It is also used to determine how healthy the current economy is as well as how effective the governments economic policy is. 4. What are three problems with the measurement of the GDP? • Quality Changes – The cost of products drops while the overall quality and function of the products rise (i.e. computers in the last 20 years) • Illegal Markets – Underground markets are
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