Based on the following data for Country X in 2018: …

Social Studies Questions
Short Answer
Step by Step Solution
Social Studies Questions

Based on the following data for Country X in 2018: – Consumption spending: 1,000 – Employee compensation: 1,100 – Government spending: 400 – Interest payments: 125 – Investment spending: 300 – Net exports: -100 – Profits: 200 – Rents: 175 – Savings: 400 Assuming the GDP deflator is 160, please answer the following: (a) Calculate the nominal GDP for 2018, showing your work. (b) Explain why the income approach and the expenditure approach for calculating GDP yield the same value. (c) Describe one difference between the CPI and the GDP deflator. (d) Calculate the real GDP for 2018 using the GDP deflator, showing your work. (e) If wheat farmers in Country X sold their entire crop for $10 million to domestic millers, who sold it for $25 million to bakeries that sold it for $65 million, how would this transaction affect Country X’s nominal GDP? Please explain.

Short Answer

The Nominal GDP for 2018 is calculated to be $1,600 based on consumption, investment, government spending, and net exports. Both the Income and Expenditure approaches to GDP provide a consistent measure, while the CPI focuses on consumer prices, contrasting with the GDP deflator, which considers all produced goods and services.

Step-by-Step Solution

Step 1: Understand Nominal GDP Calculation

To determine the Nominal GDP for 2018, we take into account various components of economic activity. This includes:

  • Consumption Spending: $1,000
  • Investment Spending: $300
  • Government Spending: $400
  • Net Exports: -$100

Adding these values together gives a Nominal GDP of $1,600, indicating the total market value of all finished goods and services produced during the year.

Step 2: Explore Income and Expenditure Approaches

The Income Approach and Expenditure Approach to GDP calculation yield the same figure as they represent two sides of the same economic coin. The income approach sums all incomes earned, while the expenditure approach totals all spending on final goods and services. In a closed economy, spending equates to income, establishing a balance between these two methods.

Step 3: Differentiate Between CPI and GDP Deflator

When comparing the Consumer Price Index (CPI) and the GDP Deflator, it’s crucial to note their scopes. The CPI tracks a fixed set of goods representing consumer purchases, highlighting changes in living costs. Conversely, the GDP deflator encompasses all goods and services produced in the economy, offering a comprehensive view of price fluctuations across a broader economic landscape.

Related Concepts

Nominal Gdp

The total market value of all finished goods and services produced within a country in a specific time period, measured using current prices without adjusting for inflation.

Income Approach

A method of calculating gdp that sums all incomes earned by factors of production in an economy, including wages, profits, rents, and taxes, to reflect economic performance.

Consumer Price Index (Cpi)

An index that measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, used to gauge inflation and changes in purchasing power.

Table Of Contents
  1. Based on the following data for Country X in 2018: – Consumption spending: 1,000 – Employee compensation: 1,100 – Government spending: 400 – Interest payments: 125 – Investment spending: 300 – Net exports: -100 – Profits: 200 – Rents: 175 – Savings: 400 Assuming the GDP deflator is 160, please answer the following: (a) Calculate the nominal GDP for 2018, showing your work. (b) Explain why the income approach and the expenditure approach for calculating GDP yield the same value. (c) Describe one difference between the CPI and the GDP deflator. (d) Calculate the real GDP for 2018 using the GDP deflator, showing your work. (e) If wheat farmers in Country X sold their entire crop for $10 million to domestic millers, who sold it for $25 million to bakeries that sold it for $65 million, how would this transaction affect Country X's nominal GDP? Please explain.

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