Ch11-AK

1A) NGDP₀₁ = 15*1000 + 5*2000 = 25,000

NGDP₀₂ = 20*1200 + 10*2200 = 46,000

1B) RGDP₀₁ = 15*1000 + 5*2000 = 25,000 = NGDP₀₁

RGDP₀₂ = 15*1200 + 5*2200 = 29,000

RDGP Growth = (29000-25000)/25000 = 16%

Deflator₀₁ = 100*25000/25000 = 100

Deflator₀₂ = 100*46000/29000 = 159

Inflation = (159-100)/100 = 59%

1C) RGDP₀₁ = 20*1000 + 10*2000 = 40,000

RGDP₀₂ = 20*1200 + 10*2200 = 46,000 = NGDP₀₂

RDGP Growth = (46000-40000)/40000 = 15%

Deflator₀₁ = 100*25000/40000 = 62.5

Deflator₀₂ = 100*46000/46000 = 100

Inflation = (100-62.5)/62.5 = 60%

In class, I argued that the year you choose to be the base year is arbitrary. This does not mean the choice is inconsequential, as the growth and inflation figures do somewhat depend upon your decision. However, no “rule of thumb” exists to guide your decision about base years, except that the base year should be a fairly recent date (many US figures currently use year 2000 prices). Note that chain-weighted Real GDP (a method beyond this course) is a method that controls for the potential bias associated with the choice of a base year.

1D) Y = 25,000

C = 5 * 2000 + 50 * 100 = 15,000

I = 0

G = 0

X = 15 * 1000 = 15,000

M = 50 * 100 = 5000

2) Economists are interested in real purchasing power. How much “stuff” can a person buy? To make comparisons across time, or even across regions/countries, we should adjust for price differences. Twain understood this well (as did our hero, the Connecticut Yankee). “Why, look here, brother Dowley, don’t you see? Your wages are merely higher than ours in name, not in fact.” Yet some people remain sadly ignorant about the differences between nominal (“in name”) and real dollars.

3A) The article states the mystery: “Affluent countries have not got much happier as they have grown richer.” The “happiness” literature offers one explanation: “people come to take for granted things they once coveted from afar.” In other words, people adjust their expectations. We might not be any happier than our grandparents were 50 years ago, but would you want to live without modern conveniences such as color TV, the internet, or ipods?

The article concludes by noting that even if GDP growth doesn’t make people happy, this does not imply that we should pursue growth retarding policies. “Ossified societies guard positional goods more, not less, jealously.” Thus, despite its flaws, GDP is probably still a good proxy for well-being.

“Money doesn’t make you happy. I now have $50 million, but I was just as happy when I had $48 million.”

– Arnold Schwarzenegger

3B) Open response… but with few exceptions, the index appears to be absurd. It suggests that Columbia, Cuba, and Vietnam are better places to live than Canada, Ireland, Norway, France, Greece, Australia, and many other well-developed nations.

3C) Open response… Arthur Okun suggested the misery index (inflation plus unemployment) as a measure of weakness. The UN measures success with the Human Development Index (which accounts for life expectancy, literacy, education, and GDP). Immigration demand would be another simple metric: Presumably people are trying to get into happy countries, and are trying to leave sad ones. Incidentally, the US is 150^th on the Happy Planet Index, but 8^th on the Human Development Index.