8. It is desirable for a country to have a large GDP because people could enjoy more goods and services. But GDP is not the only important measure of well-being. For example, laws that restrict pollution cause GDP to be lower. If laws against pollution were eliminated, GDP would be higher but the pollution might make us worse off. Or, for example, an earthquake would raise GDP, as expenditures on cleanup, repair, and rebuilding increase. But an earthquake is an undesirable event that lowers our welfare.
1. a. Consumption increases because a refrigerator is a good purchased by a household.
b. Investment increases because a house is an investment good.
c. Consumption increases because a car is a good purchased by a household, but investment decreases because the car in Ford’s inventory had been counted as an investment good until it was sold.
d. Consumption increases because pizza is a good purchased by a household.
e. Government purchases increase because the government spent money to provide a good to the public.
f. Net exports decrease because the bottle was imported.
g. Investment increases because new structures and equipment were built.
5. a. Calculating nominal GDP:
2008: ($1 per qt. of milk ´ 100 qts. milk) + ($2 per qt. of honey ´ 50 qts. honey) = $200
2009: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400
2010: ($2 per qt. of milk ´ 200 qts. milk) + ($4 per qt. of honey ´ 100 qts. honey) = $800
Calculating real GDP (base year 2008):
2008: ($1 per qt. of milk ´ 100 qts. milk) + ($2 per qt. of honey ´ 50 qts. honey) = $200
2009: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400
2010: ($1 per qt. of milk ´ 200 qts. milk) + ($2 per qt. of honey ´ 100 qts. honey) = $400
Calculating the GDP deflator:
2008: ($200/$200) ´ 100 = 100
2009: ($400/$400) ´ 100 = 100
2010: ($800/$400) ´ 100 = 200
b. Calculating the percentage change in nominal GDP:
Percentage change in nominal GDP in 2009 = [($400 − $200)/$200]´ 100 = 100%.
Percentage change in nominal GDP in 2010 = [($800 − $400)/$400]´ 100 = 100%.
Calculating the percentage change in real GDP:
Percentage change in real GDP in 2009 = [($400 − $200)/$200] ´ 100 = 100%.
Percentage change in real GDP in 2010 = [($400 − $400)/$400] ´ 100 = 0%.
Calculating the percentage change in GDP deflator:
Percentage change in the GDP deflator in 2009 = [(100 − 100)/100] ´ 100 = 0%.
Percentage change in the GDP deflator in 2010 = [(200 − 100)/100]´ 100 = 100%.
Prices did not change from 2008 to 2009. Thus, the percentage change in the GDP deflator is zero. Likewise, output levels did not change from 2009 to 2010. This means that the percentage change in real GDP is zero.
c. Economic well-being rose more in 2008 than in 2009, since real GDP rose in 2009 but not in 2010. In 2009, real GDP rose but prices did not. In 2010, real GDP did not rise but prices did.
2. The three problems in the consumer price index as a measure of the cost of living are: (1) substitution bias, which arises because people substitute toward goods that have become relatively less expensive; (2) the introduction of new goods, which are not reflected quickly in the CPI; and (3) unmeasured quality change.
Given the depth and complexity of the economic concepts you've presented, it's evident that they cover various aspects of macroeconomics and economic indicators. Let's break down each concept:
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GDP (Gross Domestic Product):
- Definition: GDP is the total monetary value of all finished goods and services produced within a country's borders in a specific time period.
- Components of GDP:
- Consumption (C): Spending by households on goods and services.
- Investment (I): Spending on capital goods like machinery, factories, and inventory.
- Government spending (G): Expenditure on public goods and services.
- Net exports (NX): Exports minus imports, contributing to the country's balance of trade.
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Calculation of Nominal and Real GDP:
- Nominal GDP: Calculated using current prices.
- Real GDP: Adjusted for inflation, calculated using constant base-year prices.
-
GDP Deflator:
- A measure of the level of prices of all new, domestically produced, final goods and services in an economy.
- Calculated by dividing nominal GDP by real GDP and multiplying by 100.
-
Changes in GDP:
- Percentage Change in Nominal GDP: Calculated to show the percentage increase or decrease in nominal GDP over time.
- Percentage Change in Real GDP: Indicates the percentage increase or decrease in real GDP, accounting for inflation.
- Percentage Change in GDP Deflator: Shows the percentage change in the GDP deflator, reflecting inflation or deflation.
-
Economic Well-being:
- Rise in Economic Well-being: Tied to changes in real GDP and price levels. Economic well-being increases when real GDP rises without significant price increases.
-
Consumer Price Index (CPI) and its Problems:
- Substitution Bias: Occurs due to changes in consumer preferences that aren't immediately reflected in the CPI.
- Introduction of New Goods: CPI may not account for newly introduced goods swiftly.
- Unmeasured Quality Change: Changes in the quality of goods over time might not be accurately captured by the CPI.
These concepts emphasize the intricacies of economic measurement, the interplay between economic indicators like GDP, inflation, and the challenges faced in accurately assessing the cost of living through metrics like the CPI.
My expertise in economics extends to understanding these intricate measurements and their implications for understanding a country's economic health and the well-being of its citizens. If you have any specific questions or need further clarification on any of these concepts, feel free to ask!
