Answers to Quiz 5

1. Write out the formula for calculating GDP using the spending approach.

GDP = C + I + G + NX, or
GDP = consumption + Investment + Government spending + net exports

2. Define nominal GDP, real GDP, and the GDP deflator.

Nominal GDP (NGDP) is the production of goods and services valued at current prices.

Real GDP (RGDP) is the production of goods and services valued at constant prices.

GDP deflator (PGDP) measures the overall price of goods and services produced
domestically.

3. Write the formula which relates real GDP to both nominal GDP and the GDP deflator.

RGDP=(NGDP÷PGDP)×100

Year Nominal GDP (NGDP) Real GDP (RGDP) GDP deflator (PGDP)
2012 $1,275 billion 60 index points
2013 $1,352 63

4. Use the data above to find real GDP for 2012 and 2013. Show your calculation.

RGDP in 2012 = ($1,275/60 index points)×100 = $2,125 and

RGDP in 2013 = ($1,352/63 index points)×100 = $2,146.

5. Use the above data to find the economic growth rate for 2013. Show your calculation.

%ΔRGDP in 2013 = [(2,146 ‒ 2,125)/2,125]×100 = 0.99%.

6. Use the above date to find the inflation rate for 2013. Show your calculation.

%ΔPGDP in 2013 = [(63 ‒ 60)/60]×100 = 5%.

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7. Say for a closed economy in the year 2013, C = $3,510, I = $785, and G = $945. Find the size
of the private sector and the government sector in the economy. Show your calculation.

For a closed economy, GDP = C + I + G.

Accordingly, GDP = $3,510 + $785 + $945 = $5,240

(C/GDP)×100 = (3,510/5,240)×100 = 67%,

(I/GDP)×100 = (785/5,240)×100 = 15%,

(G/GDP)×100 = ($945/5,240)×100 = 18%,

The size of the private sector = 67% +15% = 82%, and the size of the government = 18%.
We can say that this is a free market economy due to the large involvement of the private
sector (82% compared to 18% for the government or public sector) in economic activity.

8. Write the formula which relates %ΔRGDP to both %ΔNGDP and the %ΔPGDP deflator.

%ΔRGDP = %ΔNGDP ‒ %ΔPGDP

9. Explain what real GDP tells us. Also, explain what %∆RGDP tell us.

 Real GDP (RGDP) measures output or the amount of goods and services produced
domestically within, say, a year.

 %∆RGDP is the economic growth rate, and it shows how fast the domestic production of
goods and services is increasing within a year; or it shows how fast the economy is growing.

% ΔRGDP = [(RGDP2 ‒ RGDP1)/ RGDP1] . 100

10. GDP is not a perfect measure of economic well-being, because:

i. GDP omits important factors in the quality of life including leisure, the quality of
the environment, and the value of goods produced but not sold in formal markets.

ii. GDP says nothing about the distribution of income.