Please answer the following questions. Submit as a Microsoft Word® document to the Dropbox
when completed.
Why does inflation make nominal GDP a poor measure of the increase in total production?
Nominal GDP is “the value of final goods and services evaluated at current-year prices” and is
“calculated by summing the current values of final goods and services”, whereas “real GDP is
calculated by designating a particular year as the base year and then using the prices of goods
and services in the base year to calculate the value of goods and services in all other years
(Hubbard & O’Brien, 2009). Nominal GDP is GDP without adjustments of inflation which makes it
seem like there is growth even when there is no growth. During inflation it is difficult to estimate
how much increase in nominal GDP has been due to increase in total production and how much
increase has been due to inflation.
Which component of GDP will be affected by each of the following transactions involving
FlyCheap Airlines? If you do not believe any component will be affected, briefly explain why.
GDP = C+I+G+(X-M)
C = Consumption expenditure
I = Investment expenditure
G = Government expenditure
X = Export
M = Import
i. You purchase a ticket on a FlyCheap Airlines to visit your niece.
This would be consumption expenditure and would affect GDP. (C)
ii. FlyCheap Airlines purchases a new jetliner from Boeing.
This would be investment expenditure and would affect GDP. (I)
iii. FlyCheap Airlines purchases new seats to be installed on a jetliner it already owns.
This would be investment expenditure and would affect GDP. (I)
iv. FlyCheap Airlines purchases 200 million gallons of fuel.
Expenditure of fuel is an intermediate payment and is not part of GDP.

[MT445 | Managerial Economics]
v. A French citizen purchases a ticket to fly on a FlyCheap flight from Paris to New York.
This would be part of Export and will not affect GDP. (E)
vi. 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 would be a government expenditure and would be included in GDP. (G)
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

i. Calculate the growth rate of real GDP for each year from 1994 to 1997.
1994 is (12)/7113= (.0017)x100= (.17)%
1995 is 236/7101=.03×100= 3.32%
1996 is 196/7337=.026×100= 2.67%
1997 is 303/7533=.04×100= 4.02%
ii. Calculate the average annual growth rate of real GDP for the period from 1994 to
1997.
Average growth rate of real GDP is (.17) + 3.32 +2.67 +4.02 = 2.46%
iii. How does the average annual growth rate you calculated in (ii) above compare to
the average growth rate the U.S. normally expects?
The average annual growth rate of 2.46% that I calculated above is much lower than what
is expected normally in the U.S.

In an open economy, trade is allowed between countries. Assume a consumer purchases
$1,000 worth of furniture manufactured in China. Answer the following:

[MT445 | Managerial Economics]
a. Which component(s) of GDP are impacted by this purchase?
GDP = C+I+G+X+M
C = Consumption expenditure
I = Investment expenditure
G = Government expenditure
X = Export
M = Import
This would impact consumption expenditures from and net exports.
b. Does GDP increase, decrease or stay the same? Briefly explain why.
c. Does your answer change if the company in China is a U.S.-owned company? Why or
why not?