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Chapter 7: Q8. (page 152)

Suppose that this year鈥檚 nominal GDP is \(16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago. Using that index, we find that this year鈥檚 real GDP is \)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.

Short Answer

Expert verified

Option (a):higher than 100

Step by step solution

01

Meaning of nominal and real GDP

The nominal GDP shows the unadjusted value of the output produced within the country, and the real GDP shows the inflation-adjusted value of output produced within the country.

The price index is used to convert nominal GDP to real GDP and is given by:

PriceIndex=NominalGDPRealGDP脳100

02

Explanation for choosing option (a)

If the nominal GDP in the current year is $16 trillion and the real GDP is $15 trillion, then Price Index will be 106.66, as calculated below.

PriceIndex=NominalGDPRealGDP脳100=16trillion15trillion脳100=106.66

The price index is 106.66, which is higher than 100. Thus, option 鈥榓鈥� is correct.

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Most popular questions from this chapter

Which of the following are included in this year鈥檚 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 鈭抃(10 billion, government purchases are \)20 billion, sales of secondhand items are \(8 billion, and gross investment is \)25 billion, what is the country鈥檚 GDP for the year?

Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and income approaches. The results you obtain with the different methods should be the same.

  1. Using the above data, determine GDP by both the expenditures approach and the income approach. Then determine NDP.

  2. Now determine NI in two ways: first, by making the required additions or subtractions from NDP; and second, by adding up the types of income and taxes that makeup NI.

  3. Adjust NI (from part b) as required to obtain PI.

  4. Adjust PI (from part c) as required to obtain DI.

Contrast nominal GDP and real GDP. Why is one more reliable than the other for comparing changes in the standard of living over a series of years? What is the GDP price index, and what is its role in differentiating nominal GDP and real GDP?

Suppose that in 1994 the total output in a single-good economy was

7,000 buckets of chicken. Also suppose that in 1994 each bucket of chicken was

priced at \(10. Finally, assume that in 2015 the price per bucket of chicken was

\)16 and that 22,000 buckets were produced. Determine the GDP price index for

1994, using 2015 as the base year. By what percentage did the price level, as

measured by this index, rise between 1994 and 2015? What were the amounts of

real GDP in 1994 and 2015?
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