In year 1 and year 2, there are two products produced in a given economy, smartphones
and earphones. Suppose that there are no intermediate goods. In year 1, 4,000 smartphones
and 2,000 earphones are produced and sold at
$2,000 and $200 each, respectively. However,
due to an earthquake in year 2, some production
lines are destroyed and the production of smartphones and earphones falls to 1,000 and 1,500
units, respectively. However, the price of each
pair of smartphone doubled and the price of each
pair of earphones increased to $300.
(a) Calculate nominal GDP for year 1 and year 2.
(b) Calculate real GDP in each year and the
percentage change in real GDP from year 1
to year 2 using year 1 as the base year. Next,
do the same calculations using the chainweighting method.
(c) Calculate the implicit GDP price deflator
and the percentage inflation rate from year 1
to year 2 using year 1 as the base year. Next,
do the same calculations using the chainweighting method.
(d) Suppose that the design and quality of smartphones improved significantly in year 2. For
example, the battery life of smartphones in
year 2 was twice as long in year 1. Discuss
how this quality improvement may affect real
GDP through the output and the price level.