- Imagine an economy with the following categories of expenditures in a given year:
Consumption by households: $15 trillion
Gross investment by firms: $2.5 trillion
Government spending on goods and services: $2.5 trillion
Exports of goods and services: $2 trillion
Imports of goods and services: $3 trillion
What is GDP for this economy?
- Explore the tables of data that are part of the Module 8 Lecture. Locate the early to mid-2020 economic turmoil due to the pandemic in both the GDP and CPI data. Precisely explain how the numbers reflect what was happening in the U.S. economy at this time. In addition to explaining what the overall CPI numbers show, do a bit of your own research to see what was happening to prices in specific sectors of the economy at this time, and why. Share what you found and cite your sources of information.
- Is there a significant concern about inflation in the U.S.? Sometimes this is the case, such as when the Federal Reserve increased interest rates several times in both 2017 and 2018. The concern was that low unemployment at the time could cause upward pressure on wages and prices in the near future.
Some however would argue that there has been deflation, or at least disinflation, in several sectors such as apparel. The rise of “fast fashion” and global competition could be factors in the stagnation of apparel prices that has occurred. What do you think? What about incorporating the quality of the product into the measurement of the price? Do you see some of the issues that could come up in using and calculating economic data? - For the last part of this assignment, try some basic CPI calculations on your own using the tables from the Module 8 lecture. First, use the CPI to measure the rate of inflation between January and February of 2016. What percent inflation did you find? Now do the same thing for January and February of 1985. If you look at a long term graph of the inflation rate in the U.S. you will see quite a bit of variability, although much less than for some other nations where moderate inflation is a common experience. In later modules we will return to discussing inflation, the monetary authority of the U.S., and the relationship between inflation and unemployment.
- Finally, for now, let’s consider the effect of even a low rate of inflation, such as found in the U.S., on the purchasing power of income over long periods of time. Suppose that in January 1990 someone began a job paying $50,000 per year. Using the CPI tables, find what that job would have to pay in January 2020 to afford the same purchasing power.
Sample Solution
