1. Why does inflation make nominal GDP a poor measure of the increase in total p
ID: 2505421 • Letter: 1
Question
1. Why does inflation make nominal GDP a poor measure of the increase in total production?
2. Which component of GDP will be affected by each of the following transactions involving FlyCheap Airlines? If you do not believe any component will be affected, briefly explain why.
i. You purchase a ticket on a FlyCheap Airlines to visit your niece.
ii. FlyCheap Airlines purchases a new jetliner from Boeing.
iii. FlyCheap Airlines purchases new seats to be installed on a jetliner it already owns.
iv. FlyCheap Airlines purchases 200 million gallons of fuel.
v. A French citizen purchases a ticket to fly on a FlyCheap flight from Paris to New York.
vi. The city of Nashville agrees to spend funds to extend one of the runways so that FlyCheap will be able to land larger jets.
3. Use the table to answer the following questions.
Year
Real GDP (Billions of 2000 Dollars)
1993
$7,113
1994
7,101
1995
7,337
1996
7,533
1997
7,836
i. Calculate the growth rate of real GDP for each year from 1994 to 1997.
ii. Calculate the average annual growth rate of real GDP for the period from 1994 to 1997.
iii. How does the average annual growth rate you calculated in (ii) above compare to the average growth rate the U.S. normally expects?
4. In an open economy, trade is allowed between countries. Assume a consumer purchases $1,000 worth of furniture manufactured in China. Answer the following:
a. Which component(s) of GDP are impacted by this purchase?
b. Does GDP increase, decrease or stay the same? Briefly explain why.
c. Does your answer change if the company in China is a U.S.-owned company? Why or why not?
Year
Real GDP (Billions of 2000 Dollars)
1993
$7,113
1994
7,101
1995
7,337
1996
7,533
1997
7,836
Explanation / Answer
1. Why does inflation make nominal GDP a poor measure of the increase in total production?
Sol: Because when nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities
2. Which component of GDP will be affected by each of the following transactions involving FlyCheap Airlines? If you do not believe any component will be affected, briefly explain why.
i. You purchase a ticket on a FlyCheap Airlines to visit your niece. - C (consumption) will increase
ii. FlyCheap Airlines purchases a new jetliner from Boeing. - I (investment) will increase
iii. FlyCheap Airlines purchases new seats to be installed on a jetliner it already owns. - C (consumption) will increase
iv. FlyCheap Airlines purchases 200 million gallons of fuel. - C (consumption) will increase
v. A French citizen purchases a ticket to fly on a FlyCheap flight from Paris to New York. - X (exports) will increase
vi. The city of Nashville agrees to spend funds to extend one of the runways so that FlyCheap will be able to land larger jets. - G (government spending) will increase
3. Use the table to answer the following questions.
Year
Real GDP (Billions of 2000 Dollars)
1993
$7,113
1994
7,101
1995
7,337
1996
7,533
1997
7,836
i. Calculate the growth rate of real GDP for each year from 1994 to 1997.
ii. Calculate the average annual growth rate of real GDP for the period from 1994 to 1997.
=average annual growth rate of real GDP = (-0.17%+3.32%+2.67%+4.02%)/4= 2.46%
4.In an open economy, trade is allowed between countries. Assume a consumer purchases $1,000 worth of furniture manufactured in China. Answer the following:
a.Which component(s) of GDP are impacted by this purchase? - M (imports) component
b.Does GDP increase, decrease or stay the same? Briefly explain why.- GDP decreases. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreignsupply as domestic.
c. Does your answer change if the company in China is a U.S.-owned company? Why or why not? -
Yes, if the company in China is a U.S.-owned company, then component affected will be C (consumption). GDP will increase in this case.
Year
Real GDP (Billions of 2000 Dollars)
1993
$7,113
1994
7,101
1995
7,337
1996
7,533
1997
7,836
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