Econ 162B A0 A1 Fall 2011 Kenny Christianson due October 21 ANSWER KEY PROBLEM SET NUMBER FIVE 1 a GDP C I G X M 10 200 1800 3000 1800 2300 14 500 b GNP GDP NFIA 14 500 200 14 700 NNP GNP CCA 14 700 1900 12 800 c NI W i R profits 8000 1650 350 2800 12 800 d Statistical Discrepancy NNP NI 12 800 12 800 0 check GDP using the income approach GDP W i R profits NFIA CCA SD GDP 8000 1650 350 2800 200 1900 0 14 500 YEAR 1 good quantity price Q1 x P1 200 rocks 400 socks 600 blocks 800 clocks 200 200 200 200 1 2 3 4 nominal GDP1 Q1 x P1 2000 2 a To find nominal GDP in year 1 multiply the quantity in year 1 times the price in year 1 and then sum to find the total b If year 1 is the base year then in year 1 nominal GDP real GDP The set of prices being used to measure nominal GDP is the same as the set of prices being used to measure real GDP So in year 1 real GDP1 nominal GDP1 2000 c To find nominal GDP in year 2 multiply the quantity in year 2 times the price in year 2 and then sum to find the total YEAR 2 good quantity price Q2 x P2 600 4 rocks 150 1100 socks 220 5 800 2 400 blocks clocks 300 1800 6 nominal GDP2 Q2 x P2 4300 Econ 162B A0 A1 Fall 2011 Answer Key Five 2 d If year 1 is the base year then real GDP is measured valuing that year s output at year 1 prices So to find real GDP in year 2 we must value the output produced in year 2 at the prices that existed in year 1 good quantity 2 price 1 Q2 x P1 150 1 rocks 150 440 2 socks 220 1200 3 blocks 400 1200 4 clocks 300 real GDP2 Q2 x P1 2990 e increase in nominal GDP 4300 2000 2000 1 15 x 100 115 increase increase in real GDP 2990 2000 2000 0 495 x 100 49 5 increase f GDP price deflatort nominal GDPt real GDPt X 100 GDP price deflator1 2000 2000 1 or 100 for the GDP price index GDP price deflator2 4300 2990 1 438 or 143 8 for the GDP price index 3 a To find chain type real GDP first calculate the chain type growth rate g Q2 x P1 Q2 x P2 g x Q1 x P1 Q1 x P2 Q1 x P2 200 x 4 200 x 5 200 x 2 200 x 6 3400 so 2990 4300 x g 2000 3400 1 495 x 1 265 1 8907 1 375 b chain type real GDP g x real GDP in year 1 1 375 x 2000 2750 c Chain type GDP price deflatort nominal GDPt chain type real GDPt x 100 Chain type GDP price deflator1 2000 2000 1 or 100 Chain type GDP price deflator2 4300 2750 1 5636 or 156 35 d The chain type measure provides a lower estimate of real GDP 2750 v 2990 and a higher estimate of the GDP Price Index 156 35 vs 143 8 4 a No the Friends of the Earth does not feel that GDP is a good measure of economic welfare GDP is a brute measure of progress which doesn t take into account how the side effects of economic growth can make us worse off Econ 162B A0 A1 Fall 2011 Answer Key Five 3 GDP takes no account of increasing inequality pollution or damage to people s health and the environment It treats crime divorce and other elements of social progress as economic gains b The Index of Sustainable Economic Welfare attempts to adjust GDP to include better indicators of the quality of life It tries to measure increases in the quality of life not just increases in output Overall there are 19 adjustments which the ISEW makes to GDP calculations The Index is calculated by the Centre for Environmental Strategy and the New Economics Foundation in collaboration with the Friends of the Earth and other groups mostly British It has been calculated for 8 countries The ISEW adjusts GDP in several ways It includes calculations for such indicators as income inequality domestic labor health education services from consumer durables air pollution climate change and ozone depletion and other factors such as the costs of commuting car accidents the costs of noise and water pollution and loss of habitat and farmlands In this way ISEW provides a better measure of the quality of life in an economy 5 a The Global or Ecological Footprint is a measure of the amount of land used up in economic activity After doing the exercise you should find that everyone in the world can t live like you Most of us take about 10 30 acres per year to support ourselves and we would need 3 5 planets if everyone on the planet lived like us b The consumption components of the footprint include carbon food housing and goods and services c There are many ways to reduce our global footprint We could eat less meat drive less take trains rather than planes buy second hand clothing or live in New York City d People in New York City tend to use mass transit more than personal automobiles which reduces their global footprint Also people do not have to travel as far to go shopping Residents of New York City tend to live in apartments which are more efficient to heat than single detached houses So despite the glaring lights of Times Square the average lifestyle of a New York City resident tends to have less of a global footprint than a typical suburban or rural dweller