1..    Final goods are products at the end of the production process that end up directly in the hands of consumers. In this example, the final consumer is the airline. Therefore, the value of final output is the $210 airplane. The remaining goods (ore, metal, etc.) are intermediates and are not counted as output. Now, suppose we add up each producer’s income. Assuming that the mining company has no costs, its profits are $100 - $0 = $100. These profits are income for the owner(s). Similarly, the refiner earns $150 - $100 = $50, the plain factory earns $200 - $150 = $50, and the retailer earns $210 - $200 = $10. If we add up everybody’s income, we get $100 + $50 + $50 + $10 = $210 which is the same as the value of output.

2..    There are several things that are potentially wrong with this statement. Probably the most obvious is that this statement hasn’t corrected for the fact that prices are much higher now that they were in 1900 (approximately 15 times higher). Secondly, this doesn’t correct for the fact that there are more people in the U.S. now than there were in 1900 (approximately 4 times as many). Real GDP per capita would correct for these things.

3..

Nominal GDP (1994) = 3($5) + 6($9) = $69

Nominal GDP (1995) = 4($5) + 8($12) = $116

Nominal GDP (1996) = 4($10) + 8($24) = $232.

Recalls, to calculate real GDP, do the same calculation as above, but use 1994 (the base year) prices instead of current year prices.

Real GDP (1994) = $69

Real GDP (1995) = 4($5) +8($9) = $92

Real GDP (1996) = 4($5) +8($9) = $92

Real growth occurred from 1994 – 1995.

CPI (1994) = 3($5) + 6($9) = $69

CPI (1994) = 3($5) + 6($12) = $87

CPI (1994) = 3($10) + 6($24) = $174

Usually, the CPI is represented in terms of a base year. To do this, just divide everything by the base year price (let the base year be 1994).

CPI (1994) = 1

CPI (1995) = (87/69) = 1.26

CPI ((1996) = (174/69) = 2.52

Either representation, however, is equally correct. To calculate the annual inflation rates, recall that the inflation rate is the percentage change in the price level.

INF (1994-95) = (87-69)/69 * 100 = 26%

INF (1995-96) = (174-87)/87 *100 = 100%

Real GDP = Nominal GDP / Price

Therefore, Price = Nominal GDP / Real GDP.

This implied price is the GDP deflator. Doing this calculation, we get

GDP Def (1994) = 1

GDP Def (1995) = ($116/$92) = 1.26

GDP Def (1996) = ($232/$92) = 2.52

As in (5), the inflation rates are

INF (1994-95) = (1.26-1)/1 *100 = 26%

INF (1995-96) = (2.52-1.26)/1,26 * 100 = 100%.