MARCOECONOMICS Q&A
CASE STUDY 1, SEPTEMBER 2020
QUESTION 1: Below is the data on Germany’s GDP extracted from Eurostat, the European
Union’s statistical office, for the period 2005-2014. Real GDP is calculated with a fixed
weight method and 2005 as the base year. Fill the table by calculating
(i) The GDP deflator for each year
(ii) The change in price level, in percentage terms
Year Real GDP Nominal GDP GDP Deflator % change in
price level
2005 2,297,82 2,297,82 100 Base Year
2006 2,383,07 2,390,20 100.30 0.003
2007 2,460,99 2,510,11 101.10 0.017
2008 2,486,88 2,558,02 102.86 0.008
2009 2,346,67 2,456,66 104.69 0.018
2010 2,442,67 2,576,22 105.47 0.007
2011 2,530,36 2,699,10 106.67 0.011
2012 2,539,89 2,749,90 108.27 0.015
2013 2,542,58 2,809,48 110.50 0.021
2014 2,583,37 2,903,79 112.40 0.017
, QUESTION 2: Evaluate the following statement:
“Even if the prices of a large number of goods and services in the economy increase
dramatically, the real GDP for the economy can still fall, but if the prices of a large
number of goods and services in the economy decrease dramatically, the real GDP
for the economy cannot rise.”
ANSWER: This first statement is correct because inflation or rise in prices influences all the
determinants of GDP. One of the causes for this is an increase in imports. When domestic
products prices rise, import demand increases. Net exports are one of GDP's components.
Net exports in a given period are equal to the total amount of exports, less the total amount
of imports in the same period. Therefore, net exports drop as imports increase. In addition,
a fall in net exports decreases nominal GDP and hence real GDP. Another factor is an
increase in interest rates. Higher demand for money allows interest rates to increase, as
prices increase the supply of money stays constant. Expenditure decreases when these rises,
as the cost of money is higher. Consumer spending then drops, which is one of the main
components of GDP. Likewise, government spending also drops. Investment is also dropping
as the rate of finance lending is declining as a result of more expensive loans.
However, the second statement is wrong because real GDP measures the actual physical
quantity of commercially produced goods and services. Prices can grow in the economy on a
large number of goods and services (or even all goods and services) and also suffer a
decrease in the actual quantity of those manufactured goods and services. Likewise, the
cost of a vast number of goods and services in the market can be decreased and the actual
amount of those goods and services can also be raised.
CASE STUDY 1, SEPTEMBER 2020
QUESTION 1: Below is the data on Germany’s GDP extracted from Eurostat, the European
Union’s statistical office, for the period 2005-2014. Real GDP is calculated with a fixed
weight method and 2005 as the base year. Fill the table by calculating
(i) The GDP deflator for each year
(ii) The change in price level, in percentage terms
Year Real GDP Nominal GDP GDP Deflator % change in
price level
2005 2,297,82 2,297,82 100 Base Year
2006 2,383,07 2,390,20 100.30 0.003
2007 2,460,99 2,510,11 101.10 0.017
2008 2,486,88 2,558,02 102.86 0.008
2009 2,346,67 2,456,66 104.69 0.018
2010 2,442,67 2,576,22 105.47 0.007
2011 2,530,36 2,699,10 106.67 0.011
2012 2,539,89 2,749,90 108.27 0.015
2013 2,542,58 2,809,48 110.50 0.021
2014 2,583,37 2,903,79 112.40 0.017
, QUESTION 2: Evaluate the following statement:
“Even if the prices of a large number of goods and services in the economy increase
dramatically, the real GDP for the economy can still fall, but if the prices of a large
number of goods and services in the economy decrease dramatically, the real GDP
for the economy cannot rise.”
ANSWER: This first statement is correct because inflation or rise in prices influences all the
determinants of GDP. One of the causes for this is an increase in imports. When domestic
products prices rise, import demand increases. Net exports are one of GDP's components.
Net exports in a given period are equal to the total amount of exports, less the total amount
of imports in the same period. Therefore, net exports drop as imports increase. In addition,
a fall in net exports decreases nominal GDP and hence real GDP. Another factor is an
increase in interest rates. Higher demand for money allows interest rates to increase, as
prices increase the supply of money stays constant. Expenditure decreases when these rises,
as the cost of money is higher. Consumer spending then drops, which is one of the main
components of GDP. Likewise, government spending also drops. Investment is also dropping
as the rate of finance lending is declining as a result of more expensive loans.
However, the second statement is wrong because real GDP measures the actual physical
quantity of commercially produced goods and services. Prices can grow in the economy on a
large number of goods and services (or even all goods and services) and also suffer a
decrease in the actual quantity of those manufactured goods and services. Likewise, the
cost of a vast number of goods and services in the market can be decreased and the actual
amount of those goods and services can also be raised.
