EC 304

Assignment #2

Use the data set provided in this Excel spreadsheet to carry out the following computations.  The economy has two sectors (denoted 1 and 2), with outputs measured in physical quantities and market prices in dollars, given for the period 1990 to 2000.  Useful background reading for this assignment is:  Preview of the Comprehensive Revision of the National Income and Product Accounts:  BEA's New Featured Measures of Output and Prices (July
1995) and  BEA's Chain Indexes, Time Series and Measures of Long-Term Economic Growth (May 1997).

1.  Compute nominal GDP for this economy in each year.  What is the growth rate of nominal GDP on an annual average basis over the 10-year period (2000 over 1990)?

2.  Compute the share of sector 2 in total GDP.

3.  Using 1990 as the base year (i.e., using fixed price weights from 1990), compute real GDP in each year for this economy.  Compute the growth rate for each year (e.g., 1991 over 1990 would be the first growth rate) and compute the annual average growth rate for the 10-year period (2000 over 1990).

4.  Now, use 2000 as the base year and compute real GDP for each year.  Compute the growth rate for each year and the annual average growth rate for the 10-year period, just like you did in question 3.  Compare your results for the growth rates computed using 1990 as the base year with the results using 2000 as the base year.  How do they differ?  For example, is the recession significantly worse using one or the other?  Does the business cycle have greater amplitude using one or the other?  Does the average growth rate over the 10-year period differ depending on your method of computing real GDP?  Can you explain intuitively why your results differ?

5.  Compute a GDP deflator for this economy using each of the two real GDP series (i.e., the 1990 base year series and the 2000 base year series).  Calculate the rate of inflation for each year using the two alternative deflators.  Also, compute the annual average rate of inflation over the 10-year period.  Describe the differences between these estimates of inflation.  Can you explain why they differ?

6.  The problem with measuring real GDP that you are observing here is an extreme example of the problem that the Bureau of Economic Analysis confronted over the past 20 years as computer output expanded and computer prices plummeted.  The solution that they adopted involves computing a "chain-weighted" measure for the growth rate of real GDP.  Using the data set, compute the growth rate of chain-weighted real GDP for 1991 over 1990 and for 1992 over 1991.  Also construct the index number for real GDP in 1991 and 1992 (assuming 1990=100) from these annual growth rates.

7.  Explain why the chain-weighted measure is an improvement over the fixed-weight measures of real GDP.  Also, explain why chain-weighted real GDP no longer allows us to add together real GDP in dollars for different sectors of the economy to obtain total real GDP (which we could do with the fixed-weight measures).  

8.  If you have time, compute the chain-weighted index for real GDP for each of the 10 years.  Now calculate the average annual rate of growth over the 10-year period and compare this to the estimates you obtained using the fixed-weight base years of 1990 and 2000.

Please turn in this assignment in class next Tuesday, September 17.  You are encouraged to help each other in doing the computations, but you must write up your own analysis separately.