Use the following data to answer questions 1-3 (be sure to provide all
calculations).
.	Quantities Produced	Prices
.	CDs	Tennis Racquets	CDs	Tennis Racquets
Year 2004	100	200	20	110
Year 2005	120	210	22	120
1. Calculate real GDP for 2004 and 2005 using 2004 prices. By what
percent did real GDP grow?
2. Calculate the value of the price index for GDP for 2005 using 2004
as the base year. By what percent did prices increase?
3. Now calculate real GDP for 2004 and 2005 using 2005 prices. By what
percent did real GDP grow?
4. Review the GDP information for the past few years from the Bureau
of Economic Analysis's Website. Provide a brief summary of the GDP
trends over that timeframe and discuss two or three events which may
have caused these trends.

1.  GDP equals total production quantity times price.  In this case,
we use 2004 prices.

2004:  100($20) + 200($110) = 24000
2005:  120($20) + 210($120) = 25500
% change:  (25500 - 24000)/24000*100 = 6.25%

2.  The price index is weighted based on expenditures (methodology
used by Bureau of Labor Statistics "Consumer Price Indexes"
http://www.bls.gov/cpi/cpiovrvw.htm#item3).

Using 2004 expenditures per the instructions:

2004 price index = 2000(20) + 22000(110)/24000 = 102.5
2005 price index = 2000(22) + 22000(120)/24000 = 111.8
% change:  (111.8 - 102.5)/102.5 = 9.1%

3.    GDP equals total production quantity times price.  In this case,
we use 2005 prices.

2004:  100(22) + 200(120) = 26200
2005:  120(22) + 210(120) = 27840
% change:  (27840 - 26200)/26200 = 6.25%

The result is the same as before. This makes sense because real GDP
only measures changes in production and is not influenced by changes
in price.

4.  GDP growth was negative in two quarters of 2001, primarily because
of the effects of the decline in the stock market and the September 11
attacks.  Economic activity began to pick up in 2002 because of a
rapid decrease in interest rates, but fears of war with Iraq hurt
economic activity in late 2002 in early 2003.  An apparently easy
victory in Iraq, combined with continued strong growth in housing
sales, led to rapid growth throughout the remainder of 2003 and early
2004.  A slowdown in consumer spending, perhaps because of fears of
job insecurity, has decreased the rate of growth during the most
recent quarter.

Source: "GDP GREW 3.0% IN THE SECOND QUARTER" Bureau of Economic
Analysis http://www.bea.doc.gov/bea/newsrelarchive/2004/gdp204a_fax.pdf

Sincerely,

Wonko

THANKYOU

This doesn't make any sense!

Where do CDs and Tennis Racquets come into the equations?

Quantities Produced	     Prices
.	        CDs	Tennis Racquets	     CDs	Tennis Racquets
Year 2004	100	    200	             $20	    $110
Year 2005	120	    210	             $22	    $120

It still doesn't make any sense.

CDs and Tennis Racquets are not factors in calculating GDP in my neck of the woods.

You must have taken down the question incorrectly.

This problem, too, appears - probably a total coincidence - in
Sullivan's and Sheffrin's _Economics - Principles and Tools ___  (Ch.
5) and - hurray! There is also an answer key for this book!

Gosh

These Sullivan and Sheffrin characters sure preach a lot of rubbish.

My Economist teacher told me that in Economics exams, they set the
same questions every year ...

And just change the answers.

Anyone remember Milton Friedman?