Question

Consumption spending: 1,000

Employee compensation: 1,100
Government spending: 400
Interest payments: 125
Investment spending: 300
Net exports: −100
Profits: 200
Rents: 175
Savings: 400
The table above shows aggregate statistical data for Country X in 2018. Assume the GDP deflator is 160.
(a) Calculate the nominal GDP in 2018. Show your work.
(b) Explain why the income approach for calculating GDP yields the same value as the expenditure approach to calculating GDP.
(c) Explain one difference between the CPI and the GDP deflator.
(d) Using the GDP deflator, calculate real GDP for 2018. Show your work.
(e) Assume wheat farmers in Country X sold their entire crop of wheat to domestic wheat millers, who sold it to domestic bakeries. If the value of wheat farmers' sales is $10 million, the value of wheat millers' sales is $25 million, and the value of bakeries' sales is $65 million, by how much would Country X's nominal GDP change as a result of this transaction? Explain.

Answer 1

(a) Nominal GDP in 2018 is $2,600 million.

(d) Real GDP for 2018, using the GDP deflator, is $1,625 million.

Step-by-step explanation:

(a) To calculate nominal GDP, we sum up all the expenditures: Consumption spending + Employee compensation + Government spending + Interest payments + Investment spending + Net exports + Profits + Rents. Substituting the given values into the formula, we get $1,000 + $1,100 + $400 + $125 + $300 + (-$100) + $200 + $175 = $2,600 million.

(d) Real GDP is calculated by dividing nominal GDP by the GDP deflator (expressed as a decimal). Real GDP = Nominal GDP / (GDP deflator / 100). Substituting the given values, we get $2,600 million / (160 / 100) = $1,625 million.

The concepts of nominal GDP and real GDP, and their significance in measuring a country's economic output. Understanding the differences between these measures is essential for economic analysis and policymaking.

Answer 2

(a) Nominal GDP in 2018 is $1,600. (b) The income and expenditure approaches yield the same GDP value due to the circular flow of income. (c) CPI focuses on consumer goods, while the GDP deflator considers the entire economy. (d) Real GDP in 2018 is $1,000. (e) Nominal GDP remains unchanged due to the intermediate nature of the wheat transaction.

(a) Calculating Nominal GDP:

`\[ \text{Nominal GDP} = \text{Consumption Spending} + \text{Investment Spending} + \text{Government Spending} + \text{Net Exports} \]\[ \text{Nominal GDP} = 1,000 + 300 + 400 - 100 \]\[ \text{Nominal GDP} = 1,600 \]`

Therefore, the nominal GDP in 2018 is $1,600.

(b) The income approach and expenditure approach for calculating GDP yield the same value because they represent different perspectives on economic activity.

The income approach sums up all the incomes earned by individuals and businesses, while the expenditure approach adds up all the expenditures made on final goods and services. In a closed economy, every dollar spent on goods and services becomes someone's income, leading to an equilibrium between income and expenditure.

(c) One difference between the Consumer Price Index (CPI) and the GDP deflator is the scope of goods and services included. The CPI focuses on a fixed basket of goods and services consumed by a typical household, reflecting changes in the cost of living for consumers.

In contrast, the GDP deflator considers all goods and services produced in the economy, providing a broader measure of price changes across the entire economy.

(d) Calculating Real GDP using the GDP Deflator:

Real GDP =
`(nominal \ GDP)/(GDP \ D)`
`* 100`

`\[ \text{Real GDP} = \left( (1,600)/(160) \right) * 100 \]\[ \text{Real GDP} = 1,000 \]`

Therefore, the real GDP in 2018 is $1,000.

(e) The nominal GDP would not change as a result of this transaction. Nominal GDP measures the total value of all final goods and services produced, and the sale of wheat from farmers to millers to bakeries represents an intermediate transaction. Only the value of the final goods sold to consumers (in this case, the bread produced by the bakeries) contributes to nominal GDP.