This exercise addresses some issues related to calculating real GDP. Consider a model economy with only...

 

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This exercise addresses some issues related to calculating real GDP. Consider a model economy with only two goods. The following table shows the prices and quantities of goods produced: Year 1 2 3 4 Price (in euros per piece) Product 1 Product 2 1.00 0.95 0.90 1.00 1.00 1.10 1.20 1.10 (a) Compute nominal GDP YNOM,t for t = 1, 2, 3, 4. (b) Compute real GDP Y for t = 1,2,3, 4 using year 1 as base year (fixed base year method), i. e., using the prices in year 1. Furthermore, compute the GDP deflator Pt for t= 1, 2, 3, 4 and both the annual real GDP growth rates Yt-Yt-1 and the inflation rates πt = Pt-Pt-1 for t = 2, 3, 4. Pt-1 = YNOM,t Yt 9Y,t = Yt-1 Report Pt, gy,t and Tt rounded to four decimal places. (c) Repeat (b) using year 4 as base year. What do you observe? (d) Many countries use the (weighted) chain-linking method that uses previous years' prices to calculate real GDP. In the following, for i = {1, 2} and t = {1,2,3,4}, let qi,t denote the quantity produced of product i in year t and pi,t the price of product i in year t. The (weighted) chain-linking method consists of the following steps: gy, t . For some reference year t* = {1,...,4} compute Y₁ = YNOM,t*. • If t* < 4, for t = t* +1,...,4: Compute the weighted annual growth rate of real GDP: 2 Σ i=1 Compute the weighted real GDP: • If t* > 1, for t = t* - 1, ..., 1: gy,t+1 Quantity (in pieces) Product 1 Product 2 Pi,t qi,t YNOM,t 2 i=1 Y = (1 + gy,t) Yt-1. 100 100 90 100 X Compute the weighted annual growth rate of real GDP: Compute the weighted real GDP: Pi,t+19i,t+1 YNOM,t+1 Yt = qi,tqi,t-1 qi,t-1 90 100 110 110 X qi,t+1 gi,t qi,t Yt+1 1+gy,t+1 This exercise addresses some issues related to calculating real GDP. Consider a model economy with only two goods. The following table shows the prices and quantities of goods produced: Year 1 2 3 4 Price (in euros per piece) Product 1 Product 2 1.00 0.95 0.90 1.00 1.00 1.10 1.20 1.10 (a) Compute nominal GDP YNOM,t for t = 1, 2, 3, 4. (b) Compute real GDP Y for t = 1,2,3, 4 using year 1 as base year (fixed base year method), i. e., using the prices in year 1. Furthermore, compute the GDP deflator Pt for t= 1, 2, 3, 4 and both the annual real GDP growth rates Yt-Yt-1 and the inflation rates πt = Pt-Pt-1 for t = 2, 3, 4. Pt-1 = YNOM,t Yt 9Y,t = Yt-1 Report Pt, gy,t and Tt rounded to four decimal places. (c) Repeat (b) using year 4 as base year. What do you observe? (d) Many countries use the (weighted) chain-linking method that uses previous years' prices to calculate real GDP. In the following, for i = {1, 2} and t = {1,2,3,4}, let qi,t denote the quantity produced of product i in year t and pi,t the price of product i in year t. The (weighted) chain-linking method consists of the following steps: gy, t . For some reference year t* = {1,...,4} compute Y₁ = YNOM,t*. • If t* < 4, for t = t* +1,...,4: Compute the weighted annual growth rate of real GDP: 2 Σ i=1 Compute the weighted real GDP: • If t* > 1, for t = t* - 1, ..., 1: gy,t+1 Quantity (in pieces) Product 1 Product 2 Pi,t qi,t YNOM,t 2 i=1 Y = (1 + gy,t) Yt-1. 100 100 90 100 X Compute the weighted annual growth rate of real GDP: Compute the weighted real GDP: Pi,t+19i,t+1 YNOM,t+1 Yt = qi,tqi,t-1 qi,t-1 90 100 110 110 X qi,t+1 gi,t qi,t Yt+1 1+gy,t+1

Answer rating: 100% (QA)

Here are the steps to solve this exercise a Compute nominal GDP YNOM for t1234 Year 1 YNOM Price of Product 1 Quantity of Product 1 Price of Product 2 ... View the full answer