Macro and Microeconomics: Question 3 (Test Yourself)

Macro and Microeconomics

Question 3 (Test Yourself)

Transactions included in the GDP are; a) Payment by Smith for garage building which raises GDP by $50000.b) $ 60000 used by Smith to build himself a garage which will increase the GDP by $60000. d) Joneses $ 500000 used in purchasing the house which will raise GDP by the same amount. f) $ 25000 used in purchasing a new frame computer from IBM that would increase GDP by $25000, i) $100 gained from the stock market, which will increase GDP by $100 and j) Purchase of a new economic book from the university, which will raise the GDP by $100.

Question 3(Discussion question)

Gross Domestic product is not suitable for measuring well-being of a nation because it does not include inequality in the distribution of income and wealth. The general assumption is that wealth is equally distributed among the citizens yet it is a few individuals who are rich. Secondly, the quality of goods and services comprising the output and externalities like pollution are not considered. In addition, increase in output may be attributed to long working hours with less leisure time. There is a lot of money in the black economy like prostitution, which is not included in the GDP computation. Non-market transactions such as volunteer and household chores are also not included. Sustainability of growth is not considered in the calculation of GDP because the country may have exploited its resources, increasing its GDP.

Computation of college Price index; 

Market basket for 1982=(10*1)+(25*1)+(10*3)+(12*12)+(12*3)+(5*11)=300

Market basket for 2009=(25*1)+(55*1)+(3*35)+(12*40)+(3*30)+(11*14)=909

Price Index for 2009=Market basket for 2009* 100              =909*100

                                    Market basket for 1982                          300


Real GDP for each year; Real GDP=Nominal GDP*100

                                                              GDP deflator

a) 1981=3131*100 = 5017.63     1991=5986*100= 6673.36        2001=10206*100=9329.1

            62.4                                         89.7                                            109.4

b) % change in nominal GDP is calculated by change in the GDP *100; from 1981 to 1991 and  1991 to 2001 , the nominal GDP has changed by 91.18% and 70.50% respectively while the real GDP has changed by 43.75% from 1981 to 1991 and by 21.96% from 1991 to 2001. (b)

Percentage Change in Nominal GDP

            Between 1981 and 1991

            5986-3131 ÷ 3131 × 100

            = 91.18%

            Between 1991 and 2001

            10206 – 5986 ÷ 5986 × 100

            = 70.50 %

Percentage Change in Real GDP

            Between 1981 and 1991

            6673 – 5018 ÷ 5018 × 100

            =32.98 %

            Between 1991 and 2001

            9329 – 6673 ÷ 6673 × 100

            = 39.8%

c) Rate of inflation = Nominal growth   Inflation (1981-1991) =5986*5017.63 =1.44%

                                   Real growth                                               3131*6673.36

Inflation (1991-2001) =10206*6673.36= 1.22%


2)  Real GDP=Nominal GDP *100

                        GDP deflator

Question 2

Nominal GDP92699869.6810206
Real GDP885792249329
GDP deflator104.65107.0109.4

Nominal GDP 2000

            Real GDP × GDP deflator ÷ 100

            9224 × 107.0 ÷ 100

            = 9869.68

Real GDP 2001

            Nominal DGP ÷ GDP deflator × 100

            = 10206 ÷ 109.4 × 100

            = 9329

GDP deflator 1999

            Nominal GDP ÷ Real GDP × 100

            9269 ÷ 8857 × 100

            = 104.65

Question 3

The last few years after the crisis have witnessed a gradual decline in productivity growth and the situation may persist for much longer (Orszag). Projections indicate that the trend is likely to persist for a much longer period. One of the reasons behind the slowdown in productivity growth is the fact that a significant percentage of the population is not engaged in active productive engagements. An aging population has also been cited as one of the reasons behind the slump in productivity. The author points out that workers usually display less enthusiasm and productivity after a crisis. The impact of the crisis manifests at the level of confidence on the part of the workers as many of them become affected by insecurities that hamper their capacity to produce.

The studies indicate that the levels of productivity have been going down even before the crisis reached its peak in 2007 (Orszag). This is an indication that much of the challenges in productivity are rooted in certain structural and environmental realities that adversely influence the capacity of the economy to recover from the crisis. The study points out that much of the negative implications of the crisis are felt on a long-term basis. Total factor productivity is one of the areas that was adversely affected by the crisis. In essence, the reality poses practical challenges in the relationship between capital and labor. A disharmonious relationship between the two naturally impacts negatively on the score of productivity.

According to the author, the crisis also poses a negative effect at the level of spending. Many factories and businesses usually cut down on capital expenditure. There is less spending on improvements, investments, or expansions. As a result, the economy experiences a drastic reduction in development, which may persist for a long time with the attendant effects such as increased unemployment and a reduction in the productive capacities of the existing systems. The author points out that the reduction in productivity could bring down economic growth to the point of 2.1 percent.


Works Cited

Orszag, Peter. It’s too Soon to Celebrate a Recovery. Bloomberg. 30, Jan 2012. Web. 11 Feb, 2013.

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