GM545 Quiz 2 Guidelines

Chapter 15: Introduction to Macroeconomics Know the definition of GDP. Know what gets included or excluded when calculating GDP. Know how to calculate Nominal GDP and Real GDP given a fictitious economy with 2 products and the quantities produced and prices for those products. Heres an example for you: Sample Problem 1 Suppose the country of Alpha produces two goods, guns and butter. In 1997 (the base year know what this means), Alpha produces 1,000 guns priced at $200 and 10,000 butters priced at $1 each. In 1998, Alpha produces 800 guns priced at $400 and 9,000 units of butter priced at $2. What are Nominal and Real GDP values for Alpha in 1997 and 1998? OK. Lets create a chart for the answers to this question and explain the answers. 1997 Price Quantity Alpha Guns Butter Answer To get Nominal and Real GDP for 1997, just multiply price x quantity for each good produced in Alpha, then add up the dollar values for each good, i.e.,
1

1998 Price Quantity $400 $2 800 9,000

$200 $1

1,000 10,000

Nominal GDP (1997) = [$200 x 1,000] + [$1 x 10,000] = $210,000 Real GDP (1997) = [$200 x 1,000] + [$1 x 10,000] = $210,000

Nominal GDP and Real GDP are the same in the base year, because when you calculate Real GDP you use base year prices, and since were already in the base year, the calculations are the same.

To get Nominal GDP for 1998, just multiply price x quantity for each good produced in Alpha, then add up the dollar values for each good, i.e., Nominal GDP (1998) = [$400 x 800] + [$2 x 9,000] = $338,000 For Real GDP in 1998, you need to use the quantities produced in 1998 and the prices from 1997 (the base year). Another way of stating this is that were assuming the price never changed between 1997 and 1998, i.e. keeping prices constant, and just looking at the change in production (quantity). Real GDP (1998) = [$200 x 800] + [$1 x 9,000] = $169,000 Thats it for the calculations. An interesting side note is that if you just had the Nominal GDP number for 1998 you might think the economy grew, when in fact, as you can see from the Real GDP calculation for 1998; the economy shrank when compared to 1997.

Chapter 16: Measuring Inflation and Unemployment Know how to calculate the unemployment rate.

Chapter 25: International Trade

Know the principle of comparative advantage. Know how to solve a problem using the principle of comparative advantage. Know how to calculate the limits of the terms of trade between two countries, and the information required to establish the limits of the terms of trade.

Chapter 26: Open Economy Macroeconomics Know what an exchange rate is and how to calculate one. Know how to determine whether a currency has appreciated or depreciated versus another currency. Know factors which cause a currency to appreciate or depreciate relative to another currency. Know the effect on imports and exports when a currency appreciates. Know the effect on imports and exports when a currency depreciates.

DO ALL OF THE HOMEWORK PROBLEMS and STUDY THE ANSWERS TO THE HOMEWORK PROBLEMS, and you should do fine on QUIZ 2.