Question

Part A

Suppose that country X has current GDP of $7250 billion. The current GDP deflator is 125. In the base year, the nominal GDP for country X was also $7250 billion.
· What is country current X’s real GDP in base year prices?
· What is the rate of economic growth between the base year and the current year?

Part B

Let us imagine that there is a country called Smithsonia, which displays the following statistics. C (Consumption) is one-half of GDP, and I (Investment) is one-sixth of GDP. G (Government expenditure) is $2000 larger than investment. The country has a trade deficit of $500. What is Smithsonia’s GDP?

Answer 1

Part A

Real GDP = (Nominal GDP/GDP Deflator)*100

Hence Country X Current Real GDP = (7250 billion/125)*100 = $5800 billions

Base Year Price level = 100

Hence, Country X Base Year Real GDP = (7250 billion/100)*100 = $7250 billion

Hence Rate of economic growth between base and current year = (Change in Real GDP/Base Year Real GDP)*100

= ((5800 billions - 7250 billion)/7250 billion)*100

= -20%

Hence, Rate of economic growth between base and current year = (-)20%

Part B
At equilibrium Y(Income or GDP) = AE(Aggregate Expenditure)

AE = C + I + G + NX

C = consumption = Y/2

I = Investment = Y/6

G = Government Purchase = Y/6 + 2000

NX = Net Exports = Exports - Imports = -500(Note there is trade deficit of 500 means Exports - Imports = -500)

Hence Y = Y/2 + Y/6 + Y/6 + 2000 - 500

=> Y = Y/2 + Y/3 + 1500

=> Y/6 = 1500

=> Y = 9000

Hence, Smithsonia’s GDP = $9000