Chapter 2 The Data of Macroeconomics c. Real spending is the total value of output produced in each year valued at the prices prevailing in year 1. In year 1, the base year, her real spending equals her nominal spending of $10. In year 2, she consumes 10 green apples that are each valued at their year 1 price of $2, so her real spending is $20. That is Real Spending2=(PHd×Q2d)+(Plen×Qen) =($1×0)+($2×10) Hence, abby s real spending rises from $10 to $20 d. The implicit price deflator is calculated by dividing Abby's nominal spending in year 2 by her real spending that year: Implicit Price Deflator, =Nominal Spending Real Spendi $10 Thus, the implicit price deflator suggests that prices have fallen by half. The rea prices prevailing in year 1. From this perspective green apples appear very val son for this is that the deflator estimates how much abby values her apples usin able. In year 2, when Abby consumes 10 green apples, it appears that her con sumption has increased because the deflator values green apples more highly than red apples. The only way she could still be spending $10 on a higher consumption bundle is if the price of the good she was consuming feel. e. If Abby thinks of red apples and green apples as perfect substitutes, then the cost of living in this economy has not changed--in either year it costs $10 to consume 10 apples. according to the CPl, however the cost of living has doubled. This because the CPi only takes into account the fact that the red apple price has dou bled; the CPI ignores the fall in the price of green apples because they were not in the consumption bundle in year 1. In contrast to the CPi, the implicit price defla- or estimates the cost of living has halved. Thus, the CPl, a Laspeyres index, over states the increase in the cost of living and the deflator, a Paasche index, under- states it. This chapter of the text discusses the difference between Laspeyres and Paasche indices in more detail 8. a. Real GDP falls because Disney does not produce any services while it is closed This corresponds to a decrease in economic well-being because the income of work ers and shareholders of Disney falls (the income side of the national accounts), and people' s consumption of Disney falls (the expenditure side of the national accounts) b. Real GDP rises because the original capital and labor in farm production now pro- duce more wheat. This corresponds to an increase in the economic well-being of society, since people can now consume more wheat. (If people do not want to con- sume more wheat, then farmers and farmland can be shifted to producing other goods that society values.) c. Real GDP falls because with fewer workers on the job, firms produce less. This accurately reflects a fall in economic well-being Real GDP falls because the firms that lay off workers produce less. This decreases economic well-being because workers' incomes fall (the income side), and there are fewer goods for people to buy(the expenditure side) e. Real GDP is likely to fall, as firms shift toward production methods that produce fewer goods but emit less pollution. Economic well-being, however, may rise. The economy now produces less measured output but more clean air; clean air is notc. Real spending is the total value of output produced in each year valued at the prices prevailing in year 1. In year 1, the base year, her real spending equals her nominal spending of $10. In year 2, she consumes 10 green apples that are each valued at their year 1 price of $2, so her real spending is $20. That is, Real Spending2 = (P × Q ) + (P × Q ) = ($1 × 0) + ($2 × 10) = $20. Hence, Abby’s real spending rises from $10 to $20. d. The implicit price deflator is calculated by dividing Abby’s nominal spending in year 2 by her real spending that year: Implicit Price Deflator2 = = = 0.5. Thus, the implicit price deflator suggests that prices have fallen by half. The rea￾son for this is that the deflator estimates how much Abby values her apples using prices prevailing in year 1. From this perspective green apples appear very valu￾able. In year 2, when Abby consumes 10 green apples, it appears that her con￾sumption has increased because the deflator values green apples more highly than red apples. The only way she could still be spending $10 on a higher consumption bundle is if the price of the good she was consuming feel. e. If Abby thinks of red apples and green apples as perfect substitutes, then the cost of living in this economy has not changed—in either year it costs $10 to consume 10 apples. According to the CPI, however, the cost of living has doubled. This is because the CPI only takes into account the fact that the red apple price has dou￾bled; the CPI ignores the fall in the price of green apples because they were not in the consumption bundle in year 1. In contrast to the CPI, the implicit price defla￾tor estimates the cost of living has halved. Thus, the CPI, a Laspeyres index, over￾states the increase in the cost of living and the deflator, a Paasche index, under￾states it. This chapter of the text discusses the difference between Laspeyres and Paasche indices in more detail. 8. a. Real GDP falls because Disney does not produce any services while it is closed. This corresponds to a decrease in economic well-being because the income of work￾ers and shareholders of Disney falls (the income side of the national accounts), and people’s consumption of Disney falls (the expenditure side of the national accounts). b. Real GDP rises because the original capital and labor in farm production now pro￾duce more wheat. This corresponds to an increase in the economic well-being of society, since people can now consume more wheat. (If people do not want to con￾sume more wheat, then farmers and farmland can be shifted to producing other goods that society values.) c. Real GDP falls because with fewer workers on the job, firms produce less. This accurately reflects a fall in economic well-being. d. Real GDP falls because the firms that lay off workers produce less. This decreases economic well-being because workers’ incomes fall (the income side), and there are fewer goods for people to buy (the expenditure side). e. Real GDP is likely to fall, as firms shift toward production methods that produce fewer goods but emit less pollution. Economic well-being, however, may rise. The economy now produces less measured output but more clean air; clean air is not Chapter 2 The Data of Macroeconomics 9 1 red 2 red 1 green 2 green Nominal Spending2 Real Spending2 $10 $20