Page 194 - Krugmans Economics for AP Text Book_Neat

a. Calculate GDP as the value added in production. Economics Department’s star student, to create an index of
b.Calculate GDP as spending on final goods and services. textbook prices. The average student purchases three English,
two math, and four economics textbooks. The prices of these
c. Calculate GDP as factor income.
books are given in the accompanying table.
5. The economy of Pizzanistan resembles Pizzania (from Prob-
lem 4) except that bread and cheese are sold both to a pizza
2008 2009 2010
company as inputs in the production of pizzas and to con-
sumers as final goods. The accompanying table summarizes English textbook $50 $55 $57
the activities of the three companies. Math textbook 70 72 74
Economics textbook 80 90 100
Bread Cheese Pizza
company company company
a. What is the percent change in the price of an English text-
Cost of inputs $0 $0 $50 (Bread)
book from 2008 to 2010?
35 (Cheese)
b.What is the percent change in the price of a math textbook
Wages 25 30 75
from 2008 to 2010?
Value of output 100 60 200
c. What is the percent change in the price of an economics
textbook from 2008 to 2010?
a. Calculate GDP as the value added in production. d.Using 2008 as a base year, create a price index for these
books for all years.
b.Calculate GDP as spending on final goods and services.
e. What is the percent change in the price index from 2008
c. Calculate GDP as factor income.
to 2010?
6. The accompanying table shows data on nominal GDP (in bil-
lions of dollars), real GDP (in billions of year 2000 dollars), 8. The consumer price index, or CPI, measures the cost of living
and population (in thousands) of the United States in 1960, for a typical urban household by multiplying the price for each
1970, 1980, 1990, 2000, and 2007, years in which the U.S. price category of expenditure (housing, food, and so on) times a
level consistently rose. measure of the importance of that expenditure in the average
consumer’s market basket and summing over all categories.
However, using data from the consumer price index, we can see
Nominal GDP Real GDP that changes in the cost of living for different types of con-
(billions of (billions of Population sumers can vary a great deal. Let’s compare the cost of living
Year dollars) 2000 dollars) (thousands)
for a hypothetical retired person and a hypothetical college
1960 $526.4 $2,501.8 180,671 student. Let’s assume that the market basket of a retired per-
son is allocated in the following way: 10% on housing, 15% on
1970 1,038.5 3,771.9 205,052
food, 5% on transportation, 60% on medical care, 0% on educa-
1980 2,789.5 5,161.7 227,726 tion, and 10% on recreation. The college student’s market bas-
1990 5,803.1 7,112.5 250,132 ket is allocated as follows: 5% on housing, 15% on food, 20% on
2000 9,817.0 9,817.0 282,388 transportation, 0% on medical care, 40% on education, and
20% on recreation. The accompanying table shows the Decem-
2007 13,841.3 11,566.8 301,140
ber 2009 CPI for each of the relevant categories.

a. Why is real GDP greater than nominal GDP for all years be- CPI
fore 2000 and lower for 2007? Does nominal GDP have to December 2009
equal real GDP in 2000?
Housing 215.5
b.Calculate the percent change in real GDP from 1960 to Food 218.0
1970, 1970 to 1980, 1980 to 1990, and 1990 to 2000. Which
period had the highest growth rate? Transportation 188.3
c. Calculate real GDP per capita for each of the years in Medical care 379.5
the table. Education 128.9
d.Calculate the percent change in real GDP per capita from Recreation 113.2
1960 to 1970, 1970 to 1980, 1980 to 1990, and 1990 to
2000. Which period had the highest growth rate?
e. How do the percent change in real GDP and the percent Calculate the overall CPI for the retired person and for the col-
change in real GDP per capita compare? Which is larger? lege student by multiplying the CPI for each of the categories
Do we expect them to have this relationship? by the relative importance of that category to the individual
and then summing each of the categories. The CPI for all items
7. Eastland College is concerned about the rising price of text- in December 2009 was 215. How do your calculations for a CPI
books that students must purchase. To better identify the in- for the retired person and the college student compare to the
crease in the price of textbooks, the dean asks you, the
overall CPI?
152 section 3 Measurement of Economic Performance