Calculate Gross Domestic Product (GDP)

Calculate Gross Domestic Product (GDP)

Question 1                                                                                                                                       (12 marks)

  • The table below describes all economic activity in an economy that consists of a forester, a lumber mill, and a furniture maker. The forester sells output to the public as a final good and to the miller and furniture maker as an input in production. The miller sells output to the furniture maker as in input in production. The furniture maker sells all of her output to the public as a final good.
Forester Lumber Mill Furniture Maker
Cost of inputs $0 $100 $280
Wages $80 $100 $100
Value of output $220 $240 $580


Using the information in the table:

  • Calculate GDP as spending on final goods and services.
  • Calculate GDP as value added in production.
  • Calculate GDP as factor income.
  • Calculate GDP if the Furniture Maker purchases $10 of inputs from a firm that sells all of its output to the Furniture Maker? All other information is as given in the table.

(3 marks per part)

Question 2                                                                                                                                       (6 marks)

Since the end of the global financial crisis, the unemployment rate in the USA has fallen from a peak of nearly 10% to below 5%. Explain why this is not necessarily a sign of improvement in the labour market.

Question 3       (Data can be found on word bank development indicators – countries pages)                  (10 marks)

Under a fractional reserve system, banks keep a percentage of deposits as reserves and lend the rest out.

  • Suppose that banks hold five percent of deposits as cash reserves and that the public holds no cash (all money is held as bank deposits). Show, using the T-accounts for the banking sector, the effect of a $50 deposit. Be sure to show the mechanics of the system, and the final balances for (i) deposits, (ii) cash reserves, and (iii) loans.
  • marks)
  • Explain the role of the Reserve Bank as a lender of last resort. Under what circumstances will the Reserve Bank not lend to a bank (i.e. when does the lender of last resort mandate not apply)?

(4 marks)

Question 4                                                                                                                                       (10 marks)

Plot real GDP per capita for Greece and the USA from 2000 to 2016. Briefly: what policy tools did policy makers in the USA use to respond to the crisis, and in what ways were Greek authorities constrained from making similar choices?

Question 5                                                                                                                                       (12 marks)

  • Plot GDP deflator inflation and CPI inflation for New Zealand from 2005 to the present.

(4 marks)

  • Explain why the two series might diverge.

(4 marks)

  • The Reserve Bank of New Zealand is tasked with keeping CPI inflation between 1% and 3%. Can the Reserve Bank always control inflation in New Zealand? Explain.

(4 marks)