1. Measuring the Rate of Inflation
Here is some price data for selected consumer products from the 1970s:
The cost of a first-class stamp was $0.06.
The cost of a gallon of regular gas was $0.36.
The cost of a dozen eggs was $0.62.
The cost of a gallon of milk was $1.15.
(Source: 1970s Flashback Economy, on the Web at http://www.1970sflashback.com/1970/Economy.asp)
Construct a market basket from these goods using a Grapher.
Now, calculate the price index based on the basket. Decide a quantity and estimate current prices for each product.
Explain how an increase in nominal income and a decrease in real income might occur at the same time. Think carefully
and answer the following questions:
Who does inflation hurt?
Who does unemployment hurt? Explain the two answers.
If you had to choose between full employment with 7 percent inflation annually or 9 percent unemployment with
no or a very low and stable inflation rate, which would you choose? Why?
3. Calculating GDP
Consider the following hypothetical data for the US economy in 2010 (all amounts are in trillions of dollars).
Indirect business taxes .8
Government spending 1.8
Gross private domestic investment 2.0
a) Based on the data, what are the GDP, NDP, and NI?
b) Suppose that in 2011, exports fall to $1.3 trillion, imports rise to $1.85 trillion, and gross private domestic
investment falls to $1.25 trillion. What will the GDP be in 2011, assuming that other values do not change
between 2010 and 2011?
c) Note that according to the fictitious data in (b), depreciation (capital consumption allowance) exceeds gross
private domestic investment in 2011. How would this affect future US productivity, particularly if it were to
continue beyond 2011?
Now, consider the following table for the economy of a nation whose residents produce four final goods.
Goods Price Quantity Price Quantity
Computers 1,000 10 800 15
Apples 6 3,000 11 1,000
Televisions 100 500 150 300
Chocolates 1 10,000 2 10,000
Assuming a 2008 base year:
d) What is the nominal GDP for 2007 and 2008?
e) What is the real GDP for 2007 and 2008?