Chapter 11, Problem 2FRQ

a)

To determine

The question requires us to determine the number of pizzas and smoothies produced.

Answer to Problem 2FRQ

	Pizza in Hungry	Smoothies in Thirsty
Year 1	1,000	1,000
Year 2	2,000	1,500

Explanation of Solution

From the given table:

  $\begin{array}{c}\text{The number of pizza made in Hungry in year 1 = }\frac{\text{Nominal}\text{GDP}}{\text{Price}}\\ =\frac{\$10,000}{\$10}\\ =1,000\end{array}$

Hungry is producing 1,000 units of pizza in year 1.

  $\begin{array}{c}\text{The number of pizza made in Hungry in year 2 = }\frac{\text{Nominal}\text{GDP}}{\text{Price}}\\ =\frac{\$20,000}{\$10}\\ =2,000\end{array}$

Hungry is producing 2,000 units of pizza in year 2.

  $\begin{array}{c}\text{The number of smoothies made in Thirsty in year 1 = }\frac{\text{Nominal}\text{GDP}}{\text{Price}}\\ =\frac{\$10,000}{\$10}\\ =1,000\end{array}$

Thirsty is producing 1,000 units of smoothies in year 1.

  $\begin{array}{c}\text{The number of smoothies made in Thirsty in year 2 = }\frac{\text{Nominal}\text{GDP}}{\text{Price}}\\ =\frac{\$30,000}{\$20}\\ =1,500\end{array}$

Thirsty is producing 1.500 units of smoothies in year 2.

b)

To determine

The question requires us to determine the real GDP in year 2 using year 1 prices.

Answer to Problem 2FRQ

Real GDP in Hungry in year 2 is $20,000.

Real GDP in Thirsty in year 2 is $15,000.

Explanation of Solution

Given,

Base year price of pizza = $10

Base year price of smoothies = $10

  $\begin{array}{c}\text{The number of pizza made in Hungry in year 2 = }\frac{\text{Nominal}\text{GDP}}{\text{Price}}\\ =\frac{\$20,000}{\$10}\\ =2,000\end{array}$

Real GDP in Hungry in year 2 will be:

  $\begin{array}{c}\text{Real GDP in year 2 = Price in base year }\times \text{ quantity in year 2}\\ \text{= \$10 }\times \text{ 2,000}\\ \text{= \$20,000}\end{array}$

  $\begin{array}{c}\text{The number of smoothies made in Thirsty in year 2 = }\frac{\text{Nominal}\text{GDP}}{\text{Price}}\\ =\frac{\$30,000}{\$20}\\ =1,500\end{array}$

Real GDP in Thirsty in year 2 will be:

  $\begin{array}{c}\text{Real GDP in year 2 = Price in base year }\times \text{ quantity in year 2}\\ \text{= \$10 }\times \text{ 1,500}\\ \text{= \$15,000}\end{array}$

c)

To determine

The question requires us to determine the country in which real GDP has increased most between year 1 and year 2.

Answer to Problem 2FRQ

The value of real GDP between year 1 and year 2 increase the most in Hungry.

Explanation of Solution

  $\begin{array}{c}\text{The number of pizza made in Hungry in year 1 = }\frac{\text{Nominal}\text{GDP}}{\text{Price}}\\ =\frac{\$10,000}{\$10}\\ =1,000\end{array}$

Real GDP in Hungry in year 1 will be:

  $\begin{array}{c}\text{Real GDP in year 1 = Price in base year }\times \text{ quantity in year 1}\\ \text{= \$10 }\times \text{ 1,000}\\ \text{= \$10,000}\end{array}$

  $\begin{array}{c}\text{The number of smoothies made in Thirsty in year 1 = }\frac{\text{Nominal}\text{GDP}}{\text{Price}}\\ =\frac{\$10000}{\$10}\\ =1000\end{array}$

Real GDP in Thirsty in year 1 will be:

  $\begin{array}{c}\text{Real GDP in year 1 in Thirsty = Price in base year }\times \text{ quantity in year 1}\\ \text{= \$10 }\times \text{ 1,000}\\ \text{= \$10,000}\end{array}$

From the part (b):

Real GDP in Hungry in year 2 is $20,000.

Real GDP in Thirsty in year 2 is $15,000.

The following table represents the value of real GDP in year 1 and year 2:

	HUNGRY	THIRSTY
Year 1	$10,000	$10,000
Year 2	$20,000	$15,000

Change in real GDP in Hungry between year 1 and year 2 = $10,000

Change in real GDP in Thirsty between year 1 and year 2 = $5,000

So, the value of real GDP between year 1 and year 2 increase the most in Hungry.

d)

To determine

The question requires us to determine the country in which real GDP per capita has decreased the most in two years.

Answer to Problem 2FRQ

The value of real GDP per capita between year 1 and year 2 decreased more in Hungry than in Thirsty.

Explanation of Solution

The following expression represents the formula for real GDP per capita:

  $\text{Real GDP per capita = }\frac{\text{Real}\text{GDP}}{\text{Population}}$

In Hungry:

  $\begin{array}{c}\text{Real GDP per capita in year 1 = }\frac{\text{Real}\text{GDP}}{\text{Population}}\\ \text{= }\frac{\text{\$10,000}}{\text{5}}\\ \text{= \$2,000}\text{per}\text{person}\end{array}$

  $\begin{array}{c}\text{Real GDP per capita in year 2 = }\frac{\text{Real}\text{GDP}}{\text{Population}}\\ \text{= }\frac{\text{\$20,000}}{16}\\ \text{= \$1,250}\text{per}\text{person}\end{array}$

In Thirsty:

  $\begin{array}{c}\text{Real GDP per capita in year 1 = }\frac{\text{Real}\text{GDP}}{\text{Population}}\\ \text{= }\frac{\text{\$10,000}}{\text{5}}\\ \text{= \$2,000}\text{per}\text{person}\end{array}$

  $\begin{array}{c}\text{Real GDP per capita in year 2 = }\frac{\text{Real}\text{GDP}}{\text{Population}}\\ \text{= }\frac{\text{\$15,000}}{10}\\ \text{= \$1,500}\text{per}\text{person}\end{array}$

The following table represents the value of real GDP per capita in both countries:

	Real GDP per capita (in $ per person) in Hungry	Real GDP per capita (in $ per person) in Thirsty
Year 1	2.,000	2,000
Year 2	1250	1500

Fall in real GDP per capita in Hungry between year 1 and year 2 = $750

Fall in real GDP in Thirsty between year 1 and year 2 = $500

So, the value of real GDP per capita between year 1 and year 2 decreased more in Hungry than in Thirsty.