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Chapter 4: Problem 138

Given the following figures: $$ \begin{array}{ll} \text { Total income } & \frac{\text { Year } 1}{\$ 400 \text { billion }} & \frac{\text { Year } 6}{\$ 550 \text { billion }} \\ \text { Price index } & 1.00 & 1.00 \end{array} $$ find the increase in real income from Year 1 to Year \(6 .\)

Short Answer

Expert verified
The increase in real income from Year 1 to Year 6 is \(150\) billion.

Step by step solution

01

Calculate real income for Year 1

For Year 1, we already have the total income (nominal income) as \(400\) billion, and the price index is \(1.00\). To find the real income for Year 1, we'll divide the total income by the price index: $$\text{Real Income}_{\text{Year 1}} = \frac{\text{Total Income}_{\text{Year 1}}}{\text{Price Index}_{\text{Year 1}}}= \frac{\$400 \text{ billion}}{1.00}$$
02

Calculate real income for Year 6

Similar to step 1, for Year 6, we have the total income (nominal income) as \(550\) billion, and the price index is \(1.00\). To find the real income for Year 6, we'll divide the total income by the price index: $$\text{Real Income}_{\text{Year 6}} = \frac{\text{Total Income}_{\text{Year 6}}}{\text{Price Index}_{\text{Year 6}}}= \frac{\$550 \text{ billion}}{1.00}$$
03

Calculate the increase in real income

Now that we have calculated the real income for both Year 1 and Year 6, we'll find the difference between them to calculate the increase in real income. Subtract the real income in Year 1 from the real income in Year 6: $$\text{Increase in Real Income} = \text{Real Income}_{\text{Year 6}} - \text{Real Income}_{\text{Year 1}} = \frac{\$550 \text{ billion}}{1.00} - \frac{\$400 \text{ billion}}{1.00}$$
04

Simplify and find the answer

Simplify the expression to find the increase in real income: $$\text{Increase in Real Income} = \$550 \text{ billion} - \$400 \text{ billion} = \$150 \text{ billion}$$ So, the increase in real income from Year 1 to Year 6 is \(150\) billion.

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Most popular questions from this chapter

Suppose in an economy the income from the private sector is $$\$ 1,550$$ million. The government in this country may choose either to levy a \(5 \%\) sales tax or to levy an income tax to finance its expenditures. It balances its budget. What is the National Product of this economy, its National Income, and its Disposable Income under both proposed tax systems?

The following data provides a "real-world" illustration of adjusting GNP for changes in the price level (selected years, in billions of dollars). $$ \begin{array}{cccc} \text { Year } & \begin{array}{l} \text { Money, or } \\ \text { unadjusted GNP } \end{array} & \begin{array}{c} \text { Price level } \\ \text { index, percent } \end{array} & \begin{array}{c} \text { Adjusted } \\ \text { GNP } \end{array} \\ 1946 & \$ 209.6 & 44.06 & ? \\ 1951 & 330.2 & 57.27 & ? \\ 1958 & 448.9 & 66.06 & ? \\ 1964 & 635.7 & 72.71 & ? \\ 1968 & 868.5 & 82.57 & ? \\ 1972 & 1,171.5 & 100.00 & ? \\ 1974 & 1,406.9 & 116.20 & ? \\ 1975 & 1,498.9 & 126.37 & ? \end{array} $$ Determine the adjusted GNP for each year.

Explain the concept of a price index. Why is it important?

In January 1979, Mr. John sold his 1973 Ford to Mr. Daniel. One month later, Mr. John purchased a brand new Ford which he resold a week later to Mr. Smith. Which of the transactions would be included in the computation of 1979 GNP? Defend your position.

Explain how inflation and deflation complicate the computation of the gross national product.
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