Compute the output gap for each year

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Reference no: EM132218744

The purpose of the Unit Exercises is to assess the student's ability to apply the economics concepts learned in the unit to practical problem-solving scenarios.

Instructions

At the end of each chapter is a series of Unit Exercises. Students are to complete the exercises in Word (or some other compatible word processor) and submit by 11:00 p.m. on Sunday of Unit 2.

1. Consider the macroeconomic data shown below for a hypothetical country's economy.

 

 Real GDP (billions of $) 

 Output Gap

 (% of potential) 

 Unemployment Rate 

 (% of labour force) 

 YEAR 

 Actual 

 Potential 

 2003

1172

1192

 

11.0

 2004

1188

1200

 

10.0

 2005

1201

1209

 

9.0

 2006

1215

1219

 

8.2

 2007

1230

1226

 

7.6

 2008

1244

1240

 

7.2

 2009

1257

1251

 

7.1

 2010

1269

1262

 

7.3

 2011

1274

1274

 

7.6

a. Compute the output gap for each year.
b. In several years actual GDP exceeded potential GDP. Explain how GDP can exceed potential GDP.
c. In this example, real GDP has not fallen from year to year but at times it happens. When real GDP falls from year to year what do economists call such periods?
d. What is the unemployment rate when this economy is at "full employment"? What kind of unemployment exists at this time?

2. Consider the following data for a hypothetical economy that produces two goods: milk and honey.

 

Quantity Produced

Prices

Milk (litres)

Honey (kg)

Milk ($/litre)

Honey ($/kg)

Year 1

110

45

2

6

Year 2

125

40

3

7

a. Compute nominal GDP for each year in this economy.
b. Using year 1 as the base year, compute real GDP for each year. What is the percentage change in real GDP from year 1 to year 2?
c. Using year 1 as the base year, compute the price deflator for each year.
d. Now compute the GDP deflator for each year, using year 2 as the base year.
e. Explain why the measures of real GDP growth (and growth in the deflator) depend on the choice of base year.

Verified Expert

In the given assignment,we were required to solve the given questions in the assignment through the application of economic principles in relation to GDP of an economy.

Reference no: EM132218744

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