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Chapter 7: Q1. (page 153)

Suppose that annual output in year 1 in a three-good economy is 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter. In year 2, the output mix changes to 5 quarts of ice cream, 2 bottles of shampoo, and 2 jars of peanut butter. If the prices in both years are \(4 per quart for ice cream, \)3 per bottle of shampoo, and $2 per jar of peanut butter, what was the economy’s GDP in year 1? What was its GDP in year 2?

Short Answer

Expert verified

The economy’s GDP in year 1 was $21.

The economy’s GDP in year 2 was $30.

Step by step solution

01

Economy’s GDP in year 1

Let the quantity of ice cream quarts, shampoo bottles, and peanut butter jars be x, y, and z, respectively.

Price of ice cream per quart = $4

Price of shampoo per bottle = $3

Price of peanut butter per jar = $2

Economy’s GDP = $4x + $3y + $2z

In year 1,

Economy's GDP = $4x3+$3x1+$2x3

=$12+$3+$6

=$21

Therefore, the economy’s GDP in year 1 is $21.

02

Economy’s GDP in year 2

In year 2, the prices remain the same while the quantity mixes change. Therefore, the economy’s income in year 2 is as follows:

Economy's GDP = $4x5+$3x2+$2x2

=$20+$6+$4

=$30

Therefore, the economy’s GDP in year 2 is $30.

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Most popular questions from this chapter

Define net exports. How are net exports determined? Explain why net exports might be a negative amount.

Suppose that this year’s nominal GDP is \(16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago. Using that index, we find that this year’s real GDP is \)15 trillion. Given those numbers, we can conclude that the current value of the index is:

a. higher than 100.

b. lower than 100.

c. still 100.

Which of the following goods are usually intermediate goods and which are usually final goods: running shoes, cotton fibers, watches, textbooks, coal, sunscreen lotion, lumber?

Which of the following are included in this year’s GDP? Which are excluded? Explain your answers.

a. Interest received on an AT&T corporate bond.

b. Social Security payments received by a retired factory worker.

c. Unpaid services of a family member who painted the family home.

d. Income of a dentist from the dental services she provided.

e. A monthly allowance that a college student receives from home.

f. Money received by Josh when he resells his nearly brand-new Honda automobile to Kim.

g. The publication and sale of a new college textbook.

h. An increase in leisure resulting from a 2-hour decrease in the length of the workweek, with no reduction in pay.

i. A $2 billion increase in business inventories.

j. The purchase of 100 shares of Alphabet (the parent company of Google) stock.

If in some country personal consumption expenditures in a specific year are \(50 billion, purchases of stocks and bonds are \)30 billion, net exports are −\(10 billion, government purchases are \)20 billion, sales of secondhand items are \(8 billion, and gross investment is \)25 billion, what is the country’s GDP for the year?
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