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Chapter 4: Problem 143

Assume our economy produces only one good, product \(\mathrm{X}\), and that its quantities and prices over time are given in the following table: $$ \begin{array}{lcc} \text { Year } & \text { Units of Output } & \text { Price of } \mathrm{X} \\ 1 & 5 & \$ 10 \\ 2 & 7 & 20 \\ 3 & 8 & 25 \\ 4 & 10 & 30 \\ 5 & 11 & 28 \end{array} $$ a) Compute the price index in percent using Year 1 as the base year; i.e., (Year \(1=100\) ). b) Compute the unadjusted, or money GNP. c) Compute the adjusted, or real GNP.

Short Answer

Expert verified
a) Price index: Year 1: 100, Year 2: 200, Year 3: 250, Year 4: 300, Year 5: 280 b) Unadjusted GNP: \$998 c) Adjusted GNP: \$410

Step by step solution

01

a) Compute the price index

To compute the price index for each year using Year 1 as the base year, we will follow this formula: \( Price \ Index \) = \( \frac{Price \ of \ X \ in \ Current \ Year}{Price \ of \ X \ in \ Base \ Year} \times 100 \) Use the given data to compute the price index for each year: Year 1: \( \frac{10}{10} \times 100 = 100 \) Year 2: \( \frac{20}{10} \times 100 = 200 \) Year 3: \( \frac{25}{10} \times 100 = 250 \) Year 4: \( \frac{30}{10} \times 100 = 300 \) Year 5: \( \frac{28}{10} \times 100 = 280 \) The price index for each year is shown below: Year 1: 100 Year 2: 200 Year 3: 250 Year 4: 300 Year 5: 280
02

b) Compute the unadjusted, or money GNP

To compute the money GNP for each year, use the following formula: Money GNP = Units of Output × Price of X Year 1: \( 5 \times 10 = \$ 50 \) Year 2: \( 7 \times 20 = \$ 140 \) Year 3: \( 8 \times 25 = \$ 200 \) Year 4: \( 10 \times 30 = \$ 300 \) Year 5: \( 11 \times 28 = \$ 308 \) Sum up the values of the money GNP for all years: \( \$50 + \$140 + \$200 + \$300 + \$308 = \$998 \) Therefore, the unadjusted or money GNP is \$998.
03

c) Compute the adjusted, or real GNP

To compute the real GNP for each year, use the following formula: Real GNP = Units of Output × Price of X in Base Year (Year 1) Year 1: \( 5 \times 10 = \$ 50 \) Year 2: \( 7 \times 10 = \$ 70 \) Year 3: \( 8 \times 10 = \$ 80 \) Year 4: \( 10 \times 10 = \$ 100 \) Year 5: \( 11 \times 10 = \$ 110 \) Sum up the values of the real GNP for all years: \( \$50 + \$70 + \$80 + \$100 + \$110 = \$410 \) Therefore, the adjusted or real GNP is \$410.

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Most popular questions from this chapter

Explain fully why, in the calculation of GNP, the sale of I final goods is included while the sale of intermediate goods is excluded.

There are basically two approaches to GNP: the expenditure approach and the income approach. The following is a list of national income figures for a given year. Arrange them in the form of a consolidated income statement with revenues and allocations ( expenses ') for the whole of the economy. The figures are in billions of dollars. \(\begin{array}{lr}\text { Personal consumption expenditures (C) } & 660 \\\ \text { Transfer payments } & 127 \\ \text { Rents } & 40 \\ \text { Capital consumption allowance (depreciation) (D) } & 95 \\ \text { Social security taxes } & 46 \\ \text { Interest } & 20 \\ \text { Proprietor's income } & 68 \\ \text { Net exports } & 2 \\ \text { Dividends } & 6 \\ \text { Compensation of employees } & 642 \\ \text { Indirect business taxes } & 101 \\\ \text { Undistributed corporate profits } & 40 \\ \text { Personal taxes } & 116 \\ \text { Corporate income taxes } & 35 \\ \text { Corporate profits } & 81 \\ \text { Government purchases of goods and services } & 233 \\\ \text { Net private domestic investment }\left(I_{\text {net }}\right) & 57 \\ \text { Personal saving } & 60 \\ \text { Calculate, in addition, Personal Income (PI) and Disposable } \\ \text { Personal Income (DPI). } & \end{array}\)

When capital consumption in an economy equals $$\$ 500,000,$$ and the GNP is $$\$ 2,050,000,$$ what is the NNP? shown in the capital account?

The following are the items of the income statement of the economy for the year 1976 (in billions of dollars): $$\begin{array}{|l|l|} \hline \text { Rents } & \$ 24 \\ \hline \text { Personal consumption expenditures (C) } & 1,080 \\ \hline \text { Corporate income taxes } & 65 \\ \hline \text { Undistributed corporate profits } & 18 \\ \hline \text { Net exports (Ex - Im) } & 7 \\ \hline \text { Dividends } & 35 \\ \hline \text { Capital consumption allowance } & 180 \\ \hline \text { Interest } & 82 \\ \hline \text { Indirect business taxes } & 163 \\ \hline \text { Gross private domestic investment (I) } & 240 \\ \hline \text { Compensation of employees } & 1,028 \\ \hline \text { Government purchases of goods and services (G) } & 365 \\ \hline \text { Proprietors' income } & 97 \\ \hline \end{array}$$ Determine the Gross National Product using: a) expenditures approach b) income approach

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