Author Question: When potential GDP increases, is it necessarily the case that real GDP increases as well? Explain. ... (Read 93 times)

HudsonKB16 · **on:** Jun 29, 2018

When potential GDP increases, is it necessarily the case that real GDP increases as well? Explain.

What will be an ideal response?

Question 2

Refer to Table 19-9. Suppose that the above table represents the goods and services produced in a very simple economy in 2016. Assume that steel is used as an input in the production of autos. Using that information, calculate GDP for the year 2016.

What will be an ideal response?

raili21 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

An increase in potential GDP is a result of an expanding labor force, growth in the capital stock, and technological change. The actual level of real GDP may be higher or lower than potential GDP. If firms are all producing at capacity, we would expect potential GDP and real GDP to be equal. If firms are producing below capacity, we would expect real GDP to be below potential GDP. And if firms are temporarily producing above capacity, real GDP will be above potential GDP.

Answer to Question 2

First, we must decide which goods to include in the calculation of GDP. GDP is defined as the money value of final goods and services produced. Since steel is included in the production of autos, it is an intermediate good, not a final good. So steel should be excluded from the calculation. Final goods and services are goods and services consumed by the ultimate user of the good or service. All the other goods and services in the table are considered final goods.
Next, the money value of these final goods and services must be calculated. The money value is found by multiplying the price of the good or service times the quantity produced of that good or service. The total money value is found by summing up the individual money values. Thus GDP for 2016 = (200 5,000 ) + (25,000 500 ) + (2,000 100 ) = 1,000,000 + 12,500,000 + 200,000 = 13,700,000.