Help
The answer i got is :
GDP grew 10%
GDP for 2006 using 2005 as the base year increase by 20%
real GDP grow? 10%
If i'm right, let me know, if not, please show Calculation
Thank You
Use the following data to answer questions 1-3 (be sure to provide all calculations).
Quantity
Year CDs Tennis Racquets
2005 90 180
2006 100 90
Price
CD's Tennis Racquets
$18 $100
$20 $110
Calculate real GDP for 2005 and 2006 using 2005 prices. By what percent did real GDP grow?
Calculate the value of the price index for GDP for 2006 using 2005 as the base year. By what percent did prices increase?
Now calculate real GDP for 2005 and 2006 using 2006 prices. By what percent did real GDP grow?
Some clarifying questions first.
1) Am I to assume the entire economy consists of CDs and Tennis Racquets? I presume yes.
2) Is the Tennis Racquets production in 2006 really 90 -- should it be 190? I will assume 190.
3) You are asked to calculate a price index. There are 2 general methodologies: the Laspeyres index and the Paasche index. As the CPI is a Laspeyres index, I will assume you want the Lapeyres price index.
3) Most people calculate percentage change as (Xt/X0 - 1) (0 is the base y ear's value and t some time in the future or past). However, some economists prefer the mid-point method. I presume you want the "common" method over the mid-point method.
Now then GDP = sum(P*Q) over all goods so:
2005 GDP is 18*90 + 100*180 = 19620
2006 GDP is 20*100 + 110*190 = 22900
2006 GDP at 05 prices is 18*100 + 100*190 = 20800
Q1) Real GDP grew by 20800/19620 = 1.06 = 6%
The price index (Laspeyres method) is 100*(P2*Q1)/(P1*Q1)
CPI05 = 100
CPI06 = (20*90 + 110*180) / (18*90 + 100*180) = 100*(21600/19620) = 110
Q2) price index for 2006 is 110
Q3) Real 2006 GDP using 06 prices (e.g., deflate by CPI) is 22900/1.10 = 20818. Percent change in Real GDP is 20818/19620 = 6.1%
I hope this helps.
Thank You
To calculate the real GDP using 2005 prices, you need to multiply the quantity of each item in each year by its respective price in 2005. Then, sum up the values for each year to get the real GDP.
For 2005:
Real GDP = (Quantity of CDs in 2005 × Price of CDs in 2005) + (Quantity of Tennis Racquets in 2005 × Price of Tennis Racquets in 2005)
Real GDP = (90 × $18) + (180 × $100)
Real GDP = $1,620 + $18,000
Real GDP = $19,620
For 2006:
Real GDP = (Quantity of CDs in 2006 × Price of CDs in 2005) + (Quantity of Tennis Racquets in 2006 × Price of Tennis Racquets in 2005)
Real GDP = (100 × $18) + (90 × $100)
Real GDP = $1,800 + $9,000
Real GDP = $10,800
To calculate the percent change in real GDP, use the following formula:
Percent change = ((Final value - Initial value) / Initial value) × 100
Percent change = ((Real GDP in 2006 - Real GDP in 2005) / Real GDP in 2005) × 100
Percent change = (($10,800 - $19,620) / $19,620) × 100
Percent change = (-$8,820 / $19,620) × 100
Percent change = -44.91%
Therefore, real GDP decreased by 44.91% from 2005 to 2006 using 2005 prices.
To calculate the value of the price index for GDP in 2006 using 2005 as the base year, divide the nominal GDP in 2006 by the nominal GDP in 2005 and multiply by 100.
Nominal GDP in 2005 = (Quantity of CDs in 2005 × Price of CDs in 2005) + (Quantity of Tennis Racquets in 2005 × Price of Tennis Racquets in 2005)
Nominal GDP in 2005 = (90 × $18) + (180 × $100)
Nominal GDP in 2005 = $1,620 + $18,000
Nominal GDP in 2005 = $19,620
Nominal GDP in 2006 = (Quantity of CDs in 2006 × Price of CDs in 2006) + (Quantity of Tennis Racquets in 2006 × Price of Tennis Racquets in 2006)
Nominal GDP in 2006 = (100 × $20) + (90 × $110)
Nominal GDP in 2006 = $2,000 + $9,900
Nominal GDP in 2006 = $11,900
Price Index for GDP in 2006 = (Nominal GDP in 2006 / Nominal GDP in 2005) × 100
Price Index for GDP in 2006 = ($11,900 / $19,620) × 100
Price Index for GDP in 2006 = 60.57
To calculate the percent change in prices, use the following formula:
Percent change = ((Final value - Initial value) / Initial value) × 100
Percent change in prices = ((Price Index for GDP in 2006 - 100) / 100) × 100
Percent change in prices = ((60.57 - 100) / 100) × 100
Percent change in prices = (-39.43 / 100) × 100
Percent change in prices = -39.43%
Therefore, prices decreased by 39.43% from 2005 to 2006 using 2005 as the base year.
To calculate the real GDP using 2006 prices, follow the same steps as above but use the prices for 2006 instead.
For 2005:
Real GDP = (Quantity of CDs in 2005 × Price of CDs in 2006) + (Quantity of Tennis Racquets in 2005 × Price of Tennis Racquets in 2006)
Real GDP = (90 × $20) + (180 × $110)
Real GDP = $1,800 + $19,800
Real GDP = $21,600
For 2006:
Real GDP = (Quantity of CDs in 2006 × Price of CDs in 2006) + (Quantity of Tennis Racquets in 2006 × Price of Tennis Racquets in 2006)
Real GDP = (100 × $20) + (90 × $110)
Real GDP = $2,000 + $9,900
Real GDP = $11,900
To calculate the percent change in real GDP, use the same formula as before:
Percent change = ((Real GDP in 2006 - Real GDP in 2005) / Real GDP in 2005) × 100
Percent change = (($11,900 - $21,600) / $21,600) × 100
Percent change = (-$9,700 / $21,600) × 100
Percent change = -44.91%
Therefore, real GDP decreased by 44.91% from 2005 to 2006 using 2006 prices.