2008 B Macro FRQ #3

2008 B Macro FRQ #3

Watch me answer it here

https://youtu.be/rbnxY6mXN0o

(A) Calculate this year's nominal gross domestic product (GDP).

The GDP Cheat Sheet here.

Nominal GDP is simply this years GDP,    

Price of the goods this year multiplied by the quantity produced

(B) Assume that in Gala Land the GDP deflator (GDP price index) is 100 in the base year and 150 this year. Calculate the following.

(i) The inflation rate, expressed as a percentage, between base year and this year.

It should be clear that inflation increased by 50%. I don't know how to say this differently or better or clearer. Someone should help me.

(ii) This years real GDP.

So, if they had gave us base year prices and another years quantity, we would have used this formula.

but they didn't so,

We have to understand that Real GDP means taking into account the level of inflation. Prices have risen by 50% this year.

It is easy to think that since prices rose by 50% that we should just half the 6000 and say that the real GDP is 3000 (and that would be incorrect)

BUT, recognise that $4000 x 50% rise in prices would be, $4000 x .5 = $2000 and $2000 + $4000 = $6000.

(C) Since the base year, workers have received a 20% increase in their nominal wages. If workers face the same inflation rate as was calculated in (b) (ii) (50%), what has happened to real wages? Explain.

If workers get a 20% raise but prices of all the things they buy rise to 50%, then their real wages have dropped by 30%. Remember that real wages take into account inflation.

from the cheat sheet.

Real Wages (Purchasing Power) post

(D) If the GDP deflator in Gala Land increases unexpectedly, would a borrower with a fixed interest rate loan be better or worse off? Explain.

If the GDP deflator increases then inflation has increased. A borrower would be paying back money that is able to purchase less goods, therefore the borrower would  be better off. You bought a good that would now, cost you, significantly more money.