1.

Tutorial 1 answers

2. Measuring a Nations Income

3. Nominal GDP is the production of goods and services valued at
current prices. Real GDP is the production of goods and services
valued at constant prices. Real GDP is a better measure of
economic well-being because it reflects the economys ability to
satisfy peoples needs and desires. Thus a rise in real GDP means
people have produced more goods and services, but a rise in
nominal GDP could occur either because of increased production or
because of higher prices.
4.
5. Calculating nominal GDP:

6. 2001: ($1 per qt. of milk 100 qts. milk) + ($2 per qt. of honey
50 qts. honey) = $200

7. 2002: ($1 per qt. of milk 200 qts. milk) + ($2 per qt. of honey
100 qts. honey) = $400

8. 2003: ($2 per qt. of milk 200 qts. milk) + ($4 per qt. of honey
100 qts. honey) = $800

9.

10. Calculating real GDP (base year 2001):

11. 2001: ($1 per qt. of milk 100 qts. milk) + ($2 per qt. of honey
50 qts. honey) = $200

12. 2002: ($1 per qt. of milk 200 qts. milk) + ($2 per qt. of honey
100 qts. honey) = $400

13. 2003: ($1 per qt. of milk 200 qts. milk) + ($2 per qt. of honey
100 qts. honey) = $400

14.

15. Calculating the GDP deflator:

16. 2001: ($200/$200) 100 = 100

17. 2002: ($400/$400) 100 = 100

18. 2003: ($800/$400) 100 = 200

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20.
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22. Ye 23. Nom 24. GDP

ar inal Deflator
GDP (base
(billion year:
s) 1992)

25. 199 26. $7,6 27. 110

6 62

28. 199 29. $8,1 30. 112

7 11

31.

32. a. The growth rate of nominal GDP is ($8,111 - $7,662)/

$7,662 100% = 5.9%.

33.

34. b. The growth rate of the deflator is (112 - 110)/110

100% = 1.8%.

35.

36. c. Real GDP in 1996 (in 1992 dollars) is $7,662/

(110/100) = $6,965.

37.

38. d. Real GDP in 1997 (in 1992 dollars) is $8,111/

(112/100) = $7,242.

39.

40. e. The growth rate of real GDP is ($7,242 - $6,965)/

$6,965 100% = 4.0%.

41.

42. f. The growth rate of nominal GDP is higher than the

growth rate of real GDP because of inflation.

7. 8. 2
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43. If the government cares about the total income of Americans, it

will emphasize GNP, since that measure includes the income of
Americans that is earned abroad. If the government cares about
the total amount of economic activity occurring in the United States,
it will emphasize GDP, which measures production in the country,
whether produced by domestic citizens or foreigners.
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