Part 1- Multiple choice questions (30 points)
- In the calculation of real GDP, economists use: (4 points)
- Current year prices and current year quantities.
- Current year prices and base year quantities.
- Base year prices and base year quantities.
- Base year prices and current year quantities.
- Ahmad’s family recently finished construction of new villa in Salwa. GDP of Kuwait will count this value under: (4 points)
- I.
- G.
- NX.
- Economic growth is measured by
- changes in the employment rate. (4 points)
- changes in real GDP.
- changes in nominal GDP.
- All of the above are used to measure economic growth.
- Kuwait Oil company has its branch in Bahrein. The value created by this branch will be (4 points)
- added to neither Kuwait’s GDP nor Bahrein’s GDP.
- added to Bahrain’s GDP but not to Kuwait’s GDP.
- count as part of Kuwait’s GDP since it is a Kuwaiti corporation.
- count for both Kuwait’s GDP and Bahrein’s GDP.
- Shoe company in Italy produces 10,000 pairs a year at price 80$. Leather company produces 50,000 sq.m leather at price $4 per sq.m. From those, 20,000 sq.m was used for producing shoes and 30,000 sq.m was sold directly to the customers. What is the market value of leather, which will be counted in the GDP of Italy? (4 points)
- 800,000.
- 120,000.
- 920,000.
- 200,000.
Explain your answer for question 5 (10 points)
Part 2 – problem solving
Problem 1: (30 points)
Consider a small economy that only produces Boots, sandwiches, Smartphones and Bread (half of the bread is used in the making of sandwiches). Answer the following questions by showing your steps.
2014 | 2016 | 2017 | ||||
Product | Quantity | Price (KD) | Quantity | Price (KD) | Quantity | Price (KD) |
Boots | 1000 | 20 | 1200 | 25 | 1250 | 25 |
Sandwiches | 5000 | 4 | 5500 | 4.25 | 5500 | 4.5 |
Smartphones | 1500 | 225 | 2000 | 250 | 2100 | 275 |
Bread | 800 | 1 | 900 | 1.5 | 900 | 1.5 |
- 2014 is the base year
- Calculate Nominal and Real GDP of this economy in 2016 and 2017. (10 points)
- Calculate the real GDP growth rate in 2017. Explain the result. (5 points)
- Calculate the GDP deflator for 2016 and 2017. Explain the result. (10 points)
- Calculate the inflation rate in 2017. Explain the result. (5 points)
Problem 2 (15 points)
The following table represents information about Kuwait’s nominal and real GDP between the years 2014 and 2015. GDP is measured in millions of Kuwaiti dinars. Provide a detailed answer for each question.
2014 | 2015 | |
Nominal GDP | 46285 | 34473 |
Real GDP base year 2009 | 39307 | 39540 |
Source: Annual Statistical Abstract (Central Statistical Bureau of Kuwait)
- Explain the changes in production level between 2014 and 2015? (5 points)
- What happened to the price level between 2014 and 2015 in Kuwait? (5 points)
- What was the inflation rate in 2015? Explain the result (5 points)
Problem 3 (15 points)
State whether the following statements are true of false. In case they are false, provide an explanation.
- Household production is included in the calculation of GDP. It is an important part of the GDP.
- Armed forces of Kuwait purchased new computers. This will be included in the GDP under Investments.
- Real GDP is calculated using the current year prices.
Short Essay (10 points)
Explain the difference of calculating the inflation through the deflator and through CPI. What goods and services are included under GDP Deflator and under CPI?