# Calculating Real Prices, GDP and Wages

Assume a basket of products cost $5 million in the base year and the following is true in 2012:

The same basket of products cost $8 million in 2012

GDP = $14.4 trillion

money wages = $96,000/year

the price of gas = $2.80/gallon

the money supply = $1.6 trillion

Now determine the following and explain:

a. Price Index for 2012

b. Real GDP

c. Real wages

d. Real price of gas

e. Real money supply or real balances

f. Price index for 2013 if the inflation rate is 2% from 2012 to 2013.

https://brainmass.com/economics/macroeconomics/calculating-real-prices-gdp-wages-539784

#### Solution Preview

a)

PI(2012) = Basket(2012) / Basket(Base) x 100

PI(2012) = 8 million / 5 million x 100

PI(2012) = 160

b)

Real GDP(2012) = Nominal GDP(2012) / PI(2012) x 100

Real GDP(2012) = 14.4 ...

#### Solution Summary

Given data on the price level and the value of certain products in the base year and the current year, this solution gives detailed calculations and explanations of how to determine the following:

a. Price Index for 2012

b. Real GDP

c. Real wages

d. Real price of gas

e. Real money supply or real balances

f. Price index for 2013 if the inflation rate is 2% from 2012 to 2013.

Real Wage for Net Domestic Products

1. Describe the different phases of the business cycle, and outline how unemployment, inflation, and GDP growth will change in the different phases of the cycle.

2. a. If the CPI in 2005 is 134.5, and the CPI in 2006 is 140.5, what rate of inflation has occurred between 2005 and 2006?

b. The survey of spending in Athena shows that people consume only olive oil and grapes. In 2005, the year of the survey and also the base period, the average household spent $80 on olive oil and $50 on grapes. The price of olive oil in 2005 was $8 per bottle, and the price of grapes was $10 per gallon basket. In 2006, the price of olive oil is $8 per bottle, and the price of grapes is $12 per gallon basket. Calculate the following:

i. the cost of the CPI basket in the base period

ii. the percentage of the average household budget spent on olive oil in the base period

iii. the CPI in 2006.

3. State whether each of the following is a consumption good, an investment good, or both, and explain your choice.

a. the Mackenzie pipeline

b. a loaf of bread

c. a taxi-cab

d. a tennis racquet

4. In one day, Canada can produce either 200 tonnes of wheat or 90 tonnes of copper ingots. In one day, Chile can produce either 120 tonnes of wheat or 175 tonnes of copper ingots. Based on these numbers,

a. calculate Canada's opportunity cost of one tonne of wheat.

b. calculate Chile's opportunity cost of one tonne of copper ingots.

c. who has a comparative advantage in producing copper ingots? Why?

d. how many tonnes of wheat and how many tonnes of copper ingots will be produced if each country specializes?

5. Explain how each of the following events will influence the demand or supply of beef, and predict the change in equilibrium price and equilibrium quantity.

a. A major health study implicates beef as a prime source of cholesterol that contributes to heart disease.

b. A new breed of cattle is developed that processes food more efficiently in gaining market weight.

c. Consumers' incomes increase.

d. China and Japan start buying much more beef.

e. Land used for cattle grazing is now used for raising soybeans and hemp, and for dude ranch tourism.

6. The following table gives Canada's national accounts in 2004.

Item (in billions of dollars) Amount

Consumption expenditure 379

Government expenditure 99

Interest and investment income 48

Profit of corporations and government enterprises 80

Income from farms and unincorporated businesses 40

Gross investment 176

Net exports 14

Wages, salaries, and supplementary labour income 365

Capital consumption allowance 60

Indirect taxes less subsidies 75

a. Calculate GDP using the expenditure approach.

b. Calculate GDP using the income approach.

c. Calculate net domestic product at factor cost.

7. Calculate the real GDP in each year, assuming that the nominal GDP was $559 billion in the base year, $577 billion in year one, and $605 billion in year two; and that the price index rose from 100 to 104.5 in the first year, and up to 108.3 in the second year. If the price index 20 years before the base year was 41.2, and the nominal GDP for 20 years before the base year was 191.0, what was the real GDP for that year? Show your work in all cases.

8. Calculate the real wage for 2004 and 2005 based on the following:

• the nominal wage in 2005 increased from $19.50 per hour to $21.00 per hour

• the real wage in the base year 2003 was $18.00 per hour

• the GDP deflator was 103.6 in 2004 and 106.7 in 2005.

Comment on the different growth rates of nominal and real wages in that three year period.

9. Explain four sources of bias in the CPI, and the two main consequences of this CPI bias.

10. Statistics Canada reported that in July 2004, the Canadian labour force was 19.65 million, Canadian employment was 18.32 million, and the Canadian working-age population was 27.13 million. Calculate

a. the number of people unemployed in July 2004

b. the unemployment rate in July 2004

c. the labour force participation rate in July 2004.

11. Draw an aggregate demand/aggregate supply diagram for each of the situations below. In each diagram, predict the shift of AS and/or AD (label the axes fully), and explain why you have chosen each shift. Assume that you are at full employment as the starting point in each case.

a. The Bank of Canada decreases interest rates.

b. The Canadian government increases spending on new programs.

c. A booming economy in the United States increases Canadian exports.

d. Canadian corporate tax rates are reduced.

e. Canadian personal income tax rates increase to help fund the public debt.