You are given the following information about an economy over the five-year peri

Question

You are given the following information about an economy over the five-year period 2001-2005. All GDP values are in billions of dollars, the population (pop'n) figures are in millions. Consider 2000 as a base year. 1. Year 2001 2002 2003 2004 2005 Current dollar GDP GDP Deflator 551.6 605.9 649.9 Constant dollar GDP Pop'n 101.9 103.1 102.4 101.7 102.3 104.7 114.8 118.6 121.8 553.0 566.1 563.1 674.4 A. Fill in the missing entries in the table. Show your steps B. Current-dollar GDP increased by 9.84 percent between 2001 and 2002. Calculate the percentage increases in constant-dollar (real) income and in the GDP deflator. Why doesn't the sum of the two percentages equal the percentage increase in nominal GDP? Calculate the growth rate in real GDP per capita for 2001-2002 and 2004-2005. Which of the two periods is likely to represent a recessionary phase of the economy? C.

Explanation / Answer

B. Percentage increase in constant-dollar real income between 2001 – 2002:

Percentage increase in constant dollars = (553 – 526.8)/526.8 x 100

Percentage increase in constant dollars = 4.97%.

Percentage increase in GDP deflator between 2001 – 2002:

Percentage increase in GDP deflator = (109.4 – 104.7)/104.7 x 100

Percentage increase in GDP deflator = 4.48%.

The sum of the two percentages doesn’t equal the percentage increase in nominal GDP because the quantities vary and if we have only assumed the prices to be constant in both the cases.

C. Real GDP per capita = Real GDP / Population

Real GDP per capita for 2001 = 520,800,000,000 / 101,900,000 = $5,103.04

Real GDP per capita for 2002 = 553,000,000,000 / 103,100,000 = $5,363.72

Growth rate in real GDP per capita for 2001-2002 = (5,363.72 – 5,103.04) / 5,103.04 x 100

Growth rate in real GDP per capita for 2001-2002 = 5.1%.

Real GDP per capita for 2004 = (563,100,000,000 / 101,700,000 = $5,536.87

Real GDP per capita for 2005 = )553,700,000,000 / 102,300,000 = $5,412.51

Growth rate in real GDP per capita for 2004-2005 = (5,412.51 – 5,536.87)/5,536.87 x 100

Growth rate in real GDP per capita for 2004-2005 = -2.24%

Between the two periods, 2004-2005 represents a recessionary phase of the economy.

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