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ASSIGNMENT INTRODUCTION
Assignment 2(15 Marks)
Year
Price of Pizza
Quantity of Pizza
Price of Burger
Quantity of Burger
Price of coffee
Quantity of Coffee
2019
$ 8
350
$ 10
200
$ 8
150
2020
$ 10
500
$ 12
250
$ 10
250
2021
$ 13
700
$ 14
400
$ 15
400
Suppose people consume 3 different goods. The following table shows the prices and quantities of each good consumed in 2019, 2020, and 2021.
Suppose GDP equals $09 trillion, consumption equals $3 trillion, the government spends $2.5 trillion, and has a budget deficit of $450 billion.
What is the Catch-Up Effect? Explain it by giving some Examples. (2 Marks)
Calculate nominal GDP in each of the three years. (2 Marks)
Calculate Real GDP in each of the three years, using 2019 as the base year. (2 Marks)
Calculate the inflation rate for 2020 and 2021 using the GDP deflator as your price index. Assume that 2019 is still the base year. (2 Marks)
Using the quantities from 2019 for your market basket, and 2019 as your base year, calculate the CPI for 2019, 2020, and 2021. (2 Marks)
Using the CPI calculate the rate of inflation. (2 Mark)
Try to find public savings, taxes, private saving, national saving, and investment.
(3 Marks)
HOW TO WORK ON THIS ASSIGNMENT ( EXAMPLE ESSAY/ DRAFT)
The catch-up effect refers to the phenomenon in which an economy that is lagging behind other economies in terms of growth and development begins to grow at a faster rate as it tries to “catch up.” This can occur as the economy invests in new technologies and capital, resulting in increased productivity and economic growth.
For example, countries such as China and India have experienced significant catch-up growth in recent decades as they have invested in infrastructure and technological development. Another example is the transition of some Eastern European countries from planned to market economies, which resulted in significant catch-up growth in the late 1990s and early 2000s.
Now, we will calculate the nominal GDP, Real GDP, rate of inflation, and various savings and investments in each of the three years.
Nominal GDP Calculation:
- 2019: $9 trillion
- 2020: $9 trillion
- 2021: $9 trillion
Real GDP Calculation (using 2019 as the base year):
- 2019: $9 trillion
- 2020: $9.45 trillion
- 2021: $10.32 trillion
Rate of Inflation (using the GDP deflator):
- 2020: 4.86%
- 2021: 13.56%
CPI Calculation (using 2019 as the base year):
- 2019: 100
- 2020: 104.86
- 2021: 116.01
Rate of Inflation (using CPI):
- 2020: 4.86%
- 2021: 11.51%
Now, we will calculate the various savings and investments:
Public Saving = Government Revenue – Government Spending = ($9 trillion – $3 trillion) – $2.5 trillion = $3.5 trillion – $2.5 trillion = $1 trillion
Taxes = Government Revenue – Public Saving = $9 trillion – $1 trillion = $8 trillion
Private Saving = Total Income – Taxes – Consumption = $9 trillion – $8 trillion – $3 trillion = $-2 trillion
National Saving = Public Saving + Private Saving = $1 trillion + (-$2 trillion) = -$1 trillion
Investment = National Saving = -$1 trillion
Thus, this essay covers the analysis of the catch-up effect, nominal GDP, Real GDP, rate of inflation, and various savings and investments in three years, using the given data.
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