Econ 1250- A2 – Ch 7 Q1 In the simplified economy of Micronia the following measures are observed: Consumer spending on final goods and services= $650, Investment spending by firms =$0, Government purchases of goods and services = $100, Government revenue from Taxes on houselholds = $100, Household income from factor payments (wages, rents, profits = $750, Exports = $20, Imports = $20. a) what is the value of GDP in Micronia? b) What is the value of net exports (trade balance) ? c) What is the value of disposable income of households? d) What is the budget balance of the government of Micronia?
Q2 A simple economy of Modelia produces two goods only. The table shows the prices and output produced of the 2 goods over 3 years. Computers DVDs Year Price Quantity Price Quantity 2010 $900 10 10 100 2011 1000 10.5 12 105 2012 1050 12 14 110 a) Caluclate the Nominal GDP of Modelia in 2010 , 2011 and 2012 b) Caluclate the Real GDP for 3 years using 2010 as the base year c) What is the percentage change (growth rate) in Real GDP from 2010 to 2011.
Question One
- The gross domestic product (GDP) in Micronia refers to the value of all goods produced and services offered within the country’s boundaries during a given year. The GDP is essential because it provides economists with a clear picture of the economic status of the country, and it also helps in the determination of growth or recession in a nation. Fundamentally, the value of GDP in a country can be determined using different approaches- expenditure, output, and income. In this scenario, the expenditure approach is more appropriate because the information provided reflects spending by consumers, government, and the private sector.
Therefore, the value of GDP in Micronia can be calculated using the formula: GDP= C+G+I+NX where C, G, I, NX represent consumption, government spending, investment, and net exports, respectively.
C= $650, G= $100, I=$0, NX= (Exports-Imports) $0
GDP: $650+$100+$0+$0= $750
From the above calculation, it is determined that the value of GDP in Micronia is $750.
- In economics, net exports, also known as trade balance, represent the value of a country’s total trade. This value can be calculated using the information on the country’s total exports and imports of goods and services within a specific period.
Net Exports= value of exported goods and services (X) – Value of imported goods and services (I)
Trade Balance: $20-$20= $0
From the above calculation, it is determined that the value of net exports is $0, which signifies that Micronia has a balanced trade.
- In macroeconomics, disposable income refers to the total amount of money that is available to households of a given country after tax provisions. Often, the disposable income constitutes of both savings and money available for spending after tax deductions. Therefore, the value of the disposable income of households can be calculated by deducting income taxes from the amount of income received by a country’s households.
Therefore, disposable income in this context is $750-$100= $650.
- The budget balance of the government, also known as public fiscal balance, refers to the difference between the amount of money that a government spends in an economy and the revenue it generates from the same economy, within a specific period. Overall, the budget balance of the government can be calculated by deducting government spending from revenue collected.
In Micronia’s context, the budget balance of the government is $100-$100= $0. This value implies that government spending equal to the revenue gathered in terms of taxes.
Question Two
- The nominal GDP represents the economic production of a given country using the prices of the goods and services in each period. In Modelia’s scenario, the nominal GDP can be calculated by summing the total value of goods produced in each year. The calculation of the Nominal GDP of Modelia is:
Computers (Price * Quantity) + DVDS (Price * Quantity)
Therefore, the nominal GDP in the three years is:
2010: ($900*10) + ($10*100) = $10,000
2011: ($1000*10.5) + ($12*105) = $11,760
2012: ($1050*12) + ($14*110) =$14,140
As can be seen from the calculation, the nominal GDP of the country increased significantly from 2010 to 2012, which signifies an increase in prices of the two commodities over the years.
- Unlike the nominal GDP, which constitutes price inflation, real GDP value represents the economic production of a country with adjusted price changes. In economics, the real GDP is essential because it helps economists to determine the economic growth of a country, free of the effects of inflation.
In Modelia’s scenario, real GDP for the three years can be calculated by multiplying the quantities of goods produced in each year by the prices of the base year. 2010 is the base year, which means that the price of computers and DVDs in 2010 will be used in the calculation of the real GDP.
Real GDP for:
Year 2010: ($900*10) + ($10*100)= $10,000
Year 2011: (10.5*$900) + (105*$10)= $10,500
Year 2012: (12*$900)+ (110*$10)= $11,900
From this calculation, it is evident that the real GDP in Modelia increased significantly within three years. This phenomenon could be as a result of increased output- goods and services produced in the country throughout the years.
- The percentage growth rate in real GDP represents how fast the economy in Modelia accelerates within specific periods. The growth rate can be calculated using the formula: ((GDP in Year 2/GDP in year 1)- 1)*100%
Therefore, growth rate in real GDP in Modelia is: (($10,500/$10,000)-1) *100= 5%
This value reveals that the real GDP in Modelia accelerated at a rate of 5% between 2010 and 2011.
Question Three
- In macroeconomics, the price index represents the changes in price levels in a given country. Price index can be categorized into two: consumer and producer price index. The consumer price index determines the changes in price levels of goods and services purchased by a country’s households. In contrast, the producer price index deals with changes in the prices of commodities purchased by businesses. Overall, the price index can be used by economists to measure the rate of inflation of an economy. In the given scenario, the price index for the three years can be calculated using the formula: market basket for one year/market basket for base year*100. The market basket represents a mix of the two commodities produced in the economy. It is worth noting that the quantities used in the calculation of price index remain constant while the price change across the years. Therefore, in this scenario, the market basket for the three years are:
Year 2010: (10*900) + (100*10) = $10,000
Year 2011: (10*1000) + (100*12) =$11,200
Year 2012: (10* 1050) + (100*14) =$11,900
The above market values can then be used to calculate the price index for the three years, which are:
Year 2010: ($10,000/$10,000)*100= 100
Year 2011: ($11,200/$10,000) *100= 112
Year 2012: ($11,900/$10,000) *100= 119
The calculation reveals a significant increase in the price index from one year to the other, which means that households paid more for the purchase of the two commodities produced in the economy. Arguably, the high price of products might have been a result of the increased cost of production. Most notably, an increase in production cost may have driven firms to charge higher for the goods to help recover their expenditure and make profits. Also, high prices of raw materials required in the manufacturing of microwaves and blenders and high wages paid to human capital might have been a facilitator of the high costs of commodities.
- The GDP deflator, also known as price deflator, measures the inflation of a country in a specific year. The GDP deflator can be calculated using the formula: nominal GDP/Real GDP*100.
Therefore, the GDP deflator for the three years is:
Year 2010: ($10,000/$10,000)*100= 100
Year 2011: ($11,760/10,500)*100= 112
Year 2012: (14,140/11900)*100= 118
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