- For each of the following terms, define it as (A) real income, (B) nominal income, (C) nominal or real income, can't tell, (D) price level, (E) inflation , or (F) nothing like any of the above
Y: A
P*Y: real income valued at current prices, P, is B
Increases in cost of living: E
People searching for work: F
GDP: C. GDP is income, but we can’t tell whether it’s real or nominal.
CPI: D
Stuff produced adjusted for inflation: A. Stuff produced is income, and if you adjust for inflation, it means it’s real
New goods and services: C. New goods and services is income, but we can’t tell if it’s real or nominal
GDP Deflator: D
Capital: F
Output: C. Output is income, but no way to know whether it’s real or nominal
Growth rate of a price index: E
C+I+G+NX (measured in constant dollars): A. Constant dollars means not allowing prices to change which means inflation is adjusted out
Prices: D
Purchase of new capital: F. Purchase of new capital is investment which is only one part (of four) of GDP.
Current value of all goods and services produced: B. Current value means using current prices which means unadjusted for inflation.
Quantity of money: F
Goods getting more expensive E
P: D
Current dollar total of all wages, profits, and rent: B. Current value means nominal
- For each of the following transactions, classify it as to which part of U.S.’s national income expenditure, if any, it belong: C, I, G, NX, or is not part of GDP
ACabrillo giving a $300 scholarship to a student: Not part, a transfer payment
BFuller Brush Company buying a machine to insert the bristles in the brushes: I
CCabrillo's purchase of an empty lot to build more classrooms: Not part, is not a newly produced good
DA business buying a used file server at a fire sale from a failed dot com (dot gone) company: Not part, it’s a used good
EA Japanese business person buying a US made cell phone to help run a business: NX
FJif buying peanuts to be used to make peanut butter: Not part, intermediate good
GLawyer buying some new law books: I, it’s a tool used by a lawyer
HThe government buying a $2,000 hammer: G
IYour instructor buying French fries at In-N-Out: C
JBuying newly issued shares of stock of IBM: Not part, not a newly produced good
3. Nominal Income (2002) = $57 billion. Prices (2002) = 110. What is real income? If population is 7 million, what is real income per person? If Prices (2001) = 106, what is the inflation rate from 2001 to 2002
Real income = $57 / 1.10 = $51.8 billion
Real income per person = $51.8 billion / 7 million = $51,800 million / 7 million = $7,400
Inflation rate = 1.10 / 1.06 - 1 = 1.038 – 1 = .038 = 3.8%