GDP
What is the definition of GDP?
What is...
The market value of all of the final goods and services newly produced within a country in a given time period.
What is the difference between nominal and real GDP?
What is...
Nominal GDP is current-dollar GDP; real GDP is adjusted for inflation - prices are taken from a base year.
What is the CPI?
What is...
A measure of the cost of a standard basket of goods and services in a given year relative to the cost of the same “market basket” in the base year.
How is average labor productivity measured?
What is...
ALP = total output/number of workers = Y/L
Your barber charges $10 for a haircut and pays his assistant $2/haircut for his work. What is the market value of this haircut?
$10
What is the Value-Added Approach?
What is...
A way to calculate GDP by summing each firm’s value added (the market value of its product/service - their cost of inputs).
What is the income method?
What is...
A method of measuring GDP that sums labor income (wages, salaries) and capital incomes (interest, rents, profits) to calculate GDP.
How do we use CPI to calculate the inflation rate?
What is...
Inflation Rate = (CPI this year - CPI last year)/CPI last year
What is the growth rate/percentage change formula?
What is...
(End Value - Start Value)/(Start Value)
(End Value/Start Value) - 1
Amy’s card shop receives a shipment of Valentine’s Day cards in December 2022. Amy pays the wholesale distributor of the cards a total of $500. In February 2023 she sells the cards for a total of $700. What are the contributions of these transactions to GDP in the years 2022 and 2023?
What is...
The value added of the wholesale distributor is $500 (2022). Amy’s value added is $200 (2023).
What is the Market-Value Approach?
What is...
A way to calculate GDP by identifying newly produced final goods and summing the market value of those goods.
A country produces 4 kiwis, 6 pomegranates, and 3 shirts. Kiwis sell for $0.25 each, pomegranates sell for $0.50 each, and shirts sell for $20.00 each. What is the GDP of this country?
What is...
(4 kiwis x $0.25/kiwi) + (6 pomegranates x $0.50/pomegranate) + (3 shirts x $20.00/shirt) = $64.00
How do we adjust a nominal value into a real value using CPI?
What is...
Divide the nominal price by the CPI to output the real value.
What is the real interest rate?
What is...
The annual percentage increase in the real purchasing power of a financial asset.
= nominal interest rate - inflation rate
Derek and Nate have jobs wrapping chocolate candies and placing them in boxes. Derek can wrap 100 candies per hour. Nate can wrap 300 per hour. They both work 40 hours per week. Find the ALP in terms of candies wrapped per week for Derek, Nate, and Derek and Nate as a team.
What is...
ALP = output per worker
Derek: 40 hours/week x 100 candies = 4,000 candies per week
Nate: 12,000 candies per week
Together, their average weekly productivity = 8,000 candies per week or 200 candies per hour
What is the Expenditure Method?
What is...
A method of measuring GDP that divides the users of final goods and services into four categories (households, firms, government, foreign sector) and sums the spending from each category.
Sam sells 100 shares of stock in a firm for $50/share. He pays his broker a 2% commission for executing the sale. How does this transaction affect the current-year GDP?
What is...
$100 (the broker’s commission) is added to GDP.
Calculate the inflation rate for each year from 1930-1933 given the following information: CPI (1929) = 17.1, CPI (1930) = 16.7, CPI (1931) = 15.2, CPI (1932) = 13.7, CPI (1933) = 13.0
What is...
1930 = (16.7 - 17.1)/17.1 = -2.3%
1931 = -9.0%
1932 = 9.9%
1933 = -5.1%
What is the Fischer Effect?
What is...
Nominal interest rates tend to be higher when inflation is higher.
Suppose that the CPI basket in 2015 (the base year) is as follows: 50 cups of coffee = $50, 50 cups of tea = $50, 100 scones = $100, total expenditure = $200. Assume that consumers are indifferent between coffee and tea with their scones. In 2020, the price of coffee doubles to $2/cup and the price of scones increases to $1.50 each. The price of tea remains the same. Calculate the value of the CPI in 2020 and compare that to the true cost of living.
What is...
CPI (2020) = (50 x $2) + (50 x $1) + (100 x $1.50) = $300/$200(base year) = 1.50
Cost of Living (2020) = $250
Identify and describe the components of the expenditure method.
What are...
Consumption (household spending): durable goods, nondurable goods, services
Investment (firms’ spending): business fixed investment, residential investment, inventory investment
Government: final goods and services bought by the government
Net Exports (exports - imports)
Suppose production/prices of pizza and calzones in 2020 and 2024 is as follows: 2020 - 10 pizzas sold for $10 each and 15 calzones sold for $5 each; 2024 - 30 pizzas sold for $12 each and 30 calzones sold for $6 each. Find real GDP in 2024 and 2020, and calculate the growth in real output of the period (use 2020 as the base year).
What is...
Real GDP (2020) = 10 x $10 + 15 x $5 = $175
Real GDP (2024) = 30 x $10 + 30 x $5 = $450
(450 - 175)/175 x 100% = 157% increase
In 1950, the federal minimum wage was $0.75/hour. In 2022, it was $7.25/hour. The CPU was 0.24 in 1950 and 2.93 in 2022. How does the real minimum wage compare between the years?
What is...
Real minimum wage (1950) = $0.75/0.24 = $3.12
Real minimum wage (2022) = $7.25/2.93 = $2.47
In 1820, a member of your family deposited $10.00 in a checking account with a 4% interest rate that compounds annually. What was the value of the checking account when it was turned over to you in 2020?
What is...
$10.00 x (1.04)^200
= $25,507.50
In 1950, the federal minimum wage was $0.75/hour. In 2022, it was $7.25/hour. The CPU was 0.24 in 1950 and 2.93 in 2022. Suppose that, starting in 1950, the minimum wage was indexed to inflation. What would have been the nominal minimum wage in 2022?
What is...
The increase in the cost of living between 1950 and 2022 is 12.14 (= 2.93/0.24) which means that the cost of living in 2022 was 12.14 times what it was in 1950.
12.14 x $0.75 = $9.10