Answer to Question #132810 in Microeconomics for Faheem ali Mirani

Question

Q5: (a) Suppose that in Year 1 a firm produces 5 cars valued at $10,000 each. It has contributed $50,000
to GDP. In Year 2 its contribution is $60,000. Has the firm produced more cars? Why eliminating price
changes allows us to see more clearly whether or not there have been output changes.

Q5: (B) Assume a car dealer in Pakistan imported 20 cars directly from Japan at a cost of Rs.500,000 per
car in 2005. By close of year 2005, 15 cars were sold at Rs.600,000 per car. The remaining 5 cars were
sold in 2006 for Rs.550,000 each. How are the GNP and its major components affected in 2005 and in
2006 through this transaction?

Answer 1

5a) GDP measures the quantity of the actual produce.Real GDP hence measures the aggregate output with a constant price.Price is assumed constant to remove the effect of change in overall price level.

when you weigh GDP using price of the base year brings about overstatement of real GDP since price decreases over time.Hope this helps to understand better too.

Increase in GDP does not mean there is increased output.When GDP is nominal then that indicates price has increased while increase in real GDP indicates output has increased.

5b). Gross National Product is the market value of all goods and services produced in the national economy for a certain period (usually a calendar year).

At the same time, it does not matter at all where these services and goods were produced - within the country or abroad, the main thing is that they should be part of the national economy, that is, belong to the country.

Specifically for these transactions, we can say that the growth of GNP in 2005 increased the level of household income by the end of 2005, however, in 2006 this level began to decline. The purchasing power of the population decreased, and the car dealer had to reduce the price of previously imported goods. That is, he received less profit in the amount of

$$(600,000-550,000)\times 5=250,000$$