Problems and applications – GDP and CPI

I. GDP
1. Explain why an economy’s income must equal its expenditure.
An economy’s income must equal its expenditure because in every transaction,
the income of a seller must equal the expenditure of a buyer.
2. Which contributes more to GDP – the production of a tone of wheat or the
production of a tone of steel? Why?
I think the production of wheat would contribute more to GDP, as people demand
for food more than for steel.
3. Over the last three years, Lynn paid $3000 to put together her wardrobe (to make
it tidy). Today, she sold most of her clothes at a garage sale for $200. How does
this sale affect current GDP?
This sale doesn’t affect current GDP, because second-hand sales are not included
in GDP, for the fact that it was already counted in GDP from the first book
transaction. If it is counted twice, then there would be a double measurement
errors.
4. List the four components of GDP. Give an example of each.
- Consumption (C): the spending of households on goods and services, except
for purchases of housing. (example: the buying of wheat)
- Investment (I): the spending on capital equipment, inventories and structures,
including purchases of new housing. (ex: the purchase of combine to harvest
wheat from fields)
- Government (G): the spending on goods and services of the Government,
except for transfer payments (such as subsidies, social welfare,…). However,
when the people receiving subsidies buy goods  this amount adds up in
GDP. ( ex: expenditure on building roads)
- Net exports (NX): Goods and services exports abroad, but not imported ones.
(ex: the export of rice)
5. In the year 2011, the economy produces 100 serves of fish and chips for $8 each.
In the year 2012, the economy produces 200 serves of fish and chips for $10 each.
Calculate nominal GDP, real GDP and the GDP deflator for each year. Use 2011
as the base year. By what percentage does each of these three statistics rise from
one year to the next year?
6. What components of GDP (if any) would each of the following transactions
affect? Explain.
a. A family buys a new air conditioner
b. Uncle Macro buys a new house
c. Toyota sells a car from its inventory
d. You buy a pizza
e. The government creates a bike path around Hanoi
f. Samsung expands its factory in Bac Ninh.
7. The “government purchases” component of GDP does not include spending on
transfer payments such as pension benefits. Thinking about the definition of GDP,
explain why transfer payments are excluded.
 Transfer payments are excluded from GDP for the fact that these spending of
government are not made in exchange for any goods or services.
8.
Year P of rice Q of rice P of fish Q of fish
2000 3 100 10 50
2001 3 120 12 70
2002 4 120 14 70

2000 is the base year. Calculate:

a. Nominal and real GDP, GDP deflator in each year
b. Inflation (change in the price) in 2001 and 2002
c. Economic growth rate (change in real GDP) in 2002
d. Hyper inflation

II. CPI
1. Which do you think has a greater effect on CPI: A ten percent increase in the
price of an Ipod or 10 percent increase in the price of petrol? Why?
2. Suppose that the residents of Veggieland spend all of their income on cauliflower,
broccoli and carrots. In 2011, they buy 50 heads of cauliflower for $100, 50
bunches of broccoli for $90 and 600 carrots for $75. In 2012, they buy 60 heads
of cauliflower for $200, 60 bunches of broccoli for $100 and 600 carrots for $150.
IF the base year is 2011, what is the CPI in both years? What is inflation rate in
2012?
3. Which is the problems in the contruction of the CPI might be illustrated by each
of following situations?
a. The invention of the Ipad
b. The introductions of hybrid cars
c. Decreased banana purchases in response to an increase in their price
d. Increased purchases of the smart car.
4. Your income rises from 19 million to 31 million. In that period, CPI increases
from 122 to 169. How does your living standard change?

Included or not included in GDP?

(a) Interest on an AT&T bond.

(b) Social security payments received by a retired factory worker.

(c) The services of a family member in painting the family home.

(d) The income of a dentist.

(e) The money received by Smith when she sells her economics textbook to a book buyer.

(f) The monthly allowance a college student receives from home.

(g) Rent received on a two-bedroom apartment.

(h) The money received by Josh when he resells his current-year-model Honda
automobile to Kim.

(i) The publication of a college textbook.

(j) A 2-hour decrease in the length of the workweek.

(k) The purchase of an AT&T corporate bond.

(l) A $2 billion increase in business inventories..

(m) The purchase of 100 shares of GM common stock.

(n) The purchase of an insurance policy.