Question

The following two tables are used in all the following questions. Thus, part of the following questions involve determining exactly what you need for each question. Please assume that for GDP calculations, only two things are produced in this economy: houses (a good) and dog walking (a service). Please ignore coffee for the GDP calculations. Also, assume that 2018 is the base year for GDP calculations. The base year for the CPI is not given.

Year	Houses Produced (millions)	Average House Price	Dogs Walked (millions)	Average Dog Walking Fee
2018	1.00	$200,000	1,000	$25.00
2019	1.01	$208,000	1,010	$25.10

Year	Nominal price of a cup of coffee	CPI	CPI Market Basket	Nominal interest rate on a car loan
1989	$1.70	180	$28,800	5%
1999	$1.85	200	$32,000	3%
2009	$1.95	220	$35,200	2%
2018	$1.98	245	$39,200	5%
2019	$2.00	250	$40,000	6%

What was the economy's growth rate from 2018 to 2019?

Finally, for this and the following short-answer questions, please fully explain your answer and show all computations.

Answer 1

Growth rate is the percentage change in nominal GDP.

Calculate the nominal GDP in 2018 -

Nominal GDP = [Houses produced * Average price] + [Dogs walked * Average dog walking fee]

Nominal GDP = [1 million * $200,000] + [1,000 million * $25]

Nominal GDP = $200 billion + $25 billion

Nominal GDP = $225 billion

The nominal GDP in 2018 is $225 billion

Calculate the nominal GDP in 2019 -

Nominal GDP = [Houses produced * Average price] + [Dogs walked * Average dog walking fee]

Nominal GDP = [1.01 million * $208,000] + [1,010 million * $25.10]

Nominal GDP = $210.08 billion + $25.35 billion

Nominal GDP = $235.43 billion

The nominal GDP in 2019 is $235.43 billion

Calculate the growth rate -

Growth rate = [(Nominal GDP in 2019 - Nominal GDP in 2018)/Nominal GDP in 2018] * 100

Growth rate = [($235.43 billion - $225 billion)/$225 billion] * 100 = 4.64%

The economy's growth rate is 4.64%.