# Essay on Macroeconomics Homework 1

923 Words Sep 19th, 2013 4 Pages
Principles of Macroeconomics Homework 1 Please write down your answers as clearly as possible. 1. Below are some data from the land of milk and honey. Year 2008 2009 2010 Price of Milk \$1 \$1 \$2 Quantity of Milk 100 quarts 200 200 Price of Honey \$2 \$2 \$4 Quantity of Honey 50 quarts 100 100

a. Compute the nominal GDP, real GDP, and the GDP deflator for each year, using 2008 as the base year.
Calculating nominal GDP:

2008: (\$1 per qt. of milk  100 qts. milk) + (\$2 per qt. of honey  50 qts. honey) = \$200 2009: (\$1 per qt. of milk  200 qts. milk) + (\$2 per qt. of honey  100 qts. honey) = \$400 2010: (\$2 per qt. of milk  200 qts. milk) + (\$4 per qt. of honey  100 qts. honey) = \$800

Calculating real GDP (base year 2008): 2008: (\$1
The increase in consumption cancels the decrease in net exports, so there is no change to the total GDP (recall that GDP does not include the value of foreign produced goods)

g. Honda downsizes its factory in Marysville, Ohio
Investment decreases because some structures and equipment were put away. Total GDP decreases by the same amount.

h. A senior lady in Cleveland receives social security from the government. Neither any of the components nor the total GDP is affected. Because social security is a kind of transfer payment, which is not included in GDP. 3. Explain a. Why a closed economy’s income must equal its expenditure?
A closed economy's income must equal its expenditure, because every transaction has a buyer and a seller. Thus, expenditure by buyers must equal income by sellers.

b. Why do economists use real GDP rather than nominal GDP to gauge economic wellbeing?
Economists use real GDP rather than nominal GDP to gauge economic well-being because real GDP is not affected by changes in prices, so it reflects only changes in the amounts being produced. Because it measures the economy’s production of goods and services, it reflects the economy’s ability to satisfy people’s needs and desires. But nominal GDP is affected both by quantity and price. You cannot determine if a rise in nominal GDP has been caused by increased

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