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1. Sea Island produces only lobsters and crabs. Table 1 gives the prices and
quantities produced by Sea Island in 2006 and 2007 respectively. 2006 is the
base year.

Table 1: The Economy of Sea Island

2006 2007
Price Quantity Price Quantity
Lobsters $20 1,000 $25 1,450
Crabs $10 500 $12 525

a) Calculate nominal GDP in 2006 and 2007.

Let NGDP2006 = nominal GDP for 2006

Let NGDP2007 = nominal GDP for 2007

NGDP2006 equals 2006 quantities multiplied by 2006 prices

NGDP2006 = (1,000 x $20) + (500 x $10)) = $25,000

NGDP2007 equals 2007 quantities multiplied by 2007 prices

NGDP2007 = (1,450 x $25) + (525 x $12) = $42,550

b) What was real GDP in 2006?

Let RGDP2006 = real GDP for 2006

Note: See Table

o Since 2006 is the base period, then NGDP2006 = RGDP2006 = $25,000

c) Calculate the Fisher Volume Index (2006 is the base year)

Calculate the Fisher Volume Index by following these 3 steps:

i) Calculate the Laspeyres Volume Index for 2007:

Year2 GDP at Year1 prices

Year1 GDP at Year1 prices
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2007 GDP at 2006 prices

2006 GDP at 2006 prices

(1,450 x $20) + (525 x $10) = $34,250 = 1.37

(1,000 x $20) + (500 x $10) = $25,000
The Laspeyres Volume Index for 2007 implies that output rose by 37%
between 2006 and 2007 with 2006 as the base year.

ii) Calculate the Paasche Volume Index for 2007:

Year2 GDP at Year2 prices

Year1 GDP at Year2 prices

2007 GDP at 2007 prices

2006 GDP at 2007 prices

(1,450 x $25) + (525 x $12) = $42,550 1.372580645

(1,000 x $25) + (500 x $12) $31,000

The Paasche Volume Index for 2007 implies that output rose by 37.2%
between 2006 and 2007 with 2006 as the base year.

iii) Calculate the Fisher Volume Index for 2007:

= √ (Laspeyres Index) (Paasche Index)

= √ (1.37) (1.372580645)

= √ (1.880435484

= 1.371289716

d) Calculate Real GDP for 2007

Real GDP in 2006 and 2007 using 2006 as the Base Year
Year Index of Real GDP Real GDP
2006 1 $25,000
2007 1.371289716 $25,000(1.371289716) =
$34,282.24
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e) Calculate the GDP Deflator for 2007:

GDP Deflator = Nominal GDP in 2007

Real GDP in 2007

= $42,550
$34,282.24

= 1.241167438

2. Table 2 gives the data for a hypothetical economy where there are three final
goods included in GDP: pizzas, beer and CDs.

Table 2: Data for a Hypothetical Economy

2004 2003 (Base period)

Price Quantity Price Quantity

Pizza $8.00 110 $6.00 105

Beer $10.00 50 $8.00 55

CD’s $9.00 50 $10.00 40

a) Calculate nominal GDP in 2003 and 2004.

Let NGDP2003 = nominal GDP for 2003

Let NGDP2004 = nominal GDP for 2004

NGDP2003 equals 2003 quantities multiplied by 2003 prices

NGDP2003 = (105 x $6.00) + (55 x $8.00) + (40 x $10.00) = $1470

NGDP2004 equals 2004 quantities multiplied by 2004 prices

NGDP2004 = (110 x $8.00) + (50 x $10.00) + (50 x $9.00) = $1830

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b) What was real GDP in 2003?

Let RGDP2003 = real GDP for 2003

Note: See Table 2

o Since 2003 is the base period and NGDP2003 = RGDP2003 = $1470

c) Calculate the Fisher Volume Index using 2003 as the base year.

Calculate the Fisher Volume Index by following these 3 steps:

i) Calculate the Laspeyres Volume Index for 2004:

Year2 GDP at Year1 prices

Year1 GDP at Year1 prices

2004 GDP at 2003 prices

2003 GDP at 2003 prices

(110 x $6.00) + (50 x $8.00) + (50 x $10.00) = $1560 = 1.06122449

(105 x $6.00) + (55 x $8.00) + (40 x $10.00) $1470

The Laspeyres Volume Index for 2004 implies that output rose by 6.1%
between 2003 and 2004 with 2003 as the base year.

ii) Calculate the Paasche Volume Index for 2004:

Year2 GDP at Year2 prices

Year1 GDP at Year2 prices

2004 GDP at 2004 prices

2003 GDP at 2004 prices

(110 x $8.00) + (50 x $10.00) + (50 x $9.00) = $1830 = 1.045714286

(105 x $8.00) + (55 x $10.00) + (40 x $9.00) $1750

The Paasche Volume Index for 2004 implies that output rose by 4.6%
between 2003 and 2004 with 2004 as the base year.
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(iii) Calculate the Fisher Volume Index for 2004:

= √ (Laspeyres Index) (Paasche Index)

= √ (1.06122449) (1.045714286)

= √ (1.10973761)

= 1.053440843

o Notice that the Fisher Volume Index lies between the Laspeyres and Paasche
Indexes
o For this reason, we can think of the Fisher Volume Index as eliminating the effect
of price changes between 2003 and 2004 by using the average of 2003 and 2004
prices

d) What was real GDP in 2004 (RGDP2004)?

o To calculate RGDP2004 we need to choose a base year

o If 2003 is the base year (as mentioned above), the index of real GDP in 2003

(RGDP2003) = 1

o Recall: RGDP2003 = NGDP2003 since 2003 is the base year

o and the index of real GDP in 2004 RGDP2004 equals the Fisher Volume Index

for 2004; which as we calculated above is 1.053440843

See the table below

Real GDP in 2003 and 2004 using 2003 as the Base Year
Year Index of Real GDP Real GDP
2003 1 $1470
2004 1.053440843 $1470(1.053440843) = $1548.56
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e) What is the GDP deflator in 2004?

GDP Deflator2004 = NGDP2004

RGDP2004

= $1830
$1548.56
= 1.18
o Note that the GDP deflator can be expressed as a decimal number
(as above) or as a percentage if it is multiplied by 100
o Recall that the GDP Deflator is a measurement of inflation.

3. On January 01, 2006 Martha’s Copy Shop has 5 copier machines. During
2006, Martha scrapped 2 copier machines that were no longer working.
But also during 2006, Martha bought 3 new copier machines. By
December 31, 2006 Martha’s copy shop had 6 machines. Based on this
information determine:

a) Martha’s initial capital stock

5 copier machines on January 01, 2006

b) Depreciation

2 old copier machines that were scrapped

c) Gross Investment

3 new copier machines purchased during 2006

d) Net Investment

Gross Investment - Depreciation

3 machines - 2 machines

1 machine

Net investment can be defined as:

Gross Investment – Depreciation

Or

The change in the capital stock

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4. A French company owns a hat store in Halifax. The profits from the hat
store are included in:

a) Canadian GDP and French GNP

b) Canadian GDP and Canadian GNP

c) French GDP and French GNP

d) Canadian GNP and French GDP

5. Canadian GDP is substantially higher today than it was 60 years ago.

What does this tell us, and what does it not tell us, about the well-being of
Canadian residents?

Since this is in real terms, it tells us that the Canadian is able to make a
lot more stuff than in the past. Some of the increase in real GDP is
probably due to an increase in population, so we could say more if we
knew what happened to real GDP per person.

Supposing that there was also an increase in real GDP per person, we can
say that the standard of living has risen. Material things are in important
part of well-being. Having sufficient amounts of things such as food,
shelter, and clothing are fundamental to well-being. Other things such as
security, a safe environment, access to safe water, access to medical
care, justice and freedom also matter. However many of these things are
more easily obtained by being able to produce more using fewer
resources. Countries with higher real GDP per person tend to have longer
life spans, less discrimination towards women, less child labour, and a
higher rate of literacy.