GDP and Economic Growth

GDP and Economic Growth

  1. Why does inflation make nominal GDP a poor measure of the increase in total production?

Nominal GDP represents economic output without inflation adjustment (Arnold, 2014). Therefore, GDP would be a poor measure of the increase in total production because it includes inflation that would give an inaccurate account of the economy. Besides, when nominal GDP increases, from one year to another, the increase is due to partly changes in prices and quantity.

  1. Which component of GDP will be affected by each of the following transactions involving FlyCheap Airlines? Briefly explain.

Hint: GDP = C + I + G + Nx

  1. You purchase a ticket on a FlyCheap Airlines to visit your niece.

The consumption expenditure will be affected. Purchasing a ticket involves spending on goods and services, and this will affect the economy. Besides, it represents the money that the household spends.

  1. FlyCheap Airlines purchases a new jetliner from Boeing.

The investment will be affected. Purchasing a new jetliner from Boeing is an investment by the company because it spends money on productive equipment.

iii. FlyCheap Airlines purchases new seats to be installed on a jetliner it already owns.

This will affect the investment because it entails spending on good and services by the company.

  1. FlyCheap Airlines purchases 200 million gallons of fuel.

Nothing will be affected because purchasing 200 million gallons of fuel is not included in GDP calculations. When the company purchases fuel, the transaction involves an operational expense.

  1. A French citizen purchases a ticket to fly on a FlyCheap flight from Paris to New York.


This will affect the net export. The French citizen purchased the flying ticket from the French soil.

  1. The city of Nashville agrees to spend funds to extend one of the runways so that FlyCheap will be able to land larger jets.

This will affect the government. This is because the government will pay for the construction of runways.

  1. Use the table to answer the following questions.
Year Real GDP (Billions of 2000 Dollars)
1993 $7,113
1994 7,101
1995 7,337
1996 7,533
1997 7,836


  1. Calculate the growth rate of real GDP for each year from 1993-1994, 1994-1995, 1995-1996 and 1996-1997. Show your work.

For 1994: 7,101 -7,113/7,113 = -12/7,113 = -0.17%

1995: 7,337 – 7,101/7,101= 236/7,101 = 3.32%

1996: 7,533 – 7,337/7,337= 196/7,337 = 2.67%

1997: 7,836 – 7,533/7,533= 303/7,533 = 4.02%

  1. Calculate the average annual growth rate of real GDP for the period from 1993 to 1997.

Hint: Compute the average for the growth you calculated under (i) above.

(0.17) + 3.32 + 2.67 + 4.02 = 9.84/4 = 2.46%


iii. How does the average annual growth rate you calculated in (ii) above compare to the average GDP growth rate the U.S. normally expects?

According to forecasters, the U.S. normally expects a 4% GDP growth (Irwin, 2015). Therefore, the average annual growth rate calculated (2.46) is lower than what the country expects.

  1. In an open economy, trade is allowed between countries. Assume a consumer purchases $1,000 worth of furniture manufactured in China. Answer the following:
  2. Which component(s) of GDP are impacted by this purchase?

This will affect the consumption expenditure and net export.

  1. Does GDP increase, decrease or stay the same? Briefly explain.

The GDP will decrease because the consumer imports the product from China. Furniture purchase, which represents an import, decreases the GDP.

  1. Does your answer change if the company in China is a U.S. owned company? Why?

Yes, my answer will change if the company is U.S. owned. The monetary value involved in the transaction would be included in the GDP calculation because it would be measured as U.S. money.

  1. Describe the relationship between labor productivity and long term economic growth. How do technological advancements impact labor productivity?

Labor productivity is the real output per labor hour. Labor productivity growth depends on technology, investment and saving, and human capital (Mankiw, 2009). With positive changes, these factors will enable employees to produce more good and services for a given number of hours. In addition, advancement in technology will reduce production time, labor hours and improves standards and production capacity of the firm. This will increase labor productivity.



Arnold, R. A. (2014). Economics. Melbourne, Vic.: South-Western Cenage Learning.

Irwin, Neil. (July 18, 2015). Forecasters Expect a Strong Economy for the 2016 Presidential Election. Retrieved from

Mankiw, N. G. (2009). Principles of economics. Mason, OH: South-Western Cengage Learning.

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