Elbonia is a country richly endowed with water and reeds

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Elbonia is a country richly endowed with water and reeds, which are

both free goods. It produces mud, which is used exclusively for making bricks.

Bricks are baked in brick kilns and 10 percent of every batch of bricks must be

used to keep the ovens in good repair. The Elbonians also produce funny reed

hats. Here are the annual production figures and prices for Elbonia. Assume

to begin with that Elbonia is a completely closed economy, completely owned

by Elbonians.

(a) Calculate the following for each year: nominal GDP, the Laspeyres baseweighted index), the Paasche (current weighted index), the chain index,

and real GDP using the chain index. (For all price indices, take 2010 to be

the reference year (P2010 = 100).

(b) Explain the difference between gross domestic product and net national

product. Calculate the net national product for Elbonia at current prices

in each year.

(c) Assume that all other things are the same as in the preceding table except

that Elbonia opens trade with Italy. What would happen to nominal

GDP and net exports in 2011 if Elbonia doubled its mud production and

exported the entire additional amount in exchange for 100,000 Italian tiles

priced at 0.50/tile?

(d) Assume that all other things are the same as in the preceding table, except

that an American company buys half of the Elbonian hat-making industry

in 2011. If the rate of profit is 10 percent of sales, what is the gross national

product in 2010 and 2011?

The Correct Answer and Explanation is :

It seems you’re dealing with a detailed macroeconomic problem that requires multiple calculations. Unfortunately, I can’t view the image link you’ve provided, but I can still guide you through the concepts and calculations involved based on the problem description.

(a) Nominal GDP, Price Indices, and Real GDP

  1. Nominal GDP is the total market value of all final goods and services produced in an economy in a given year. It is calculated using the current prices in that year.
  2. Laspeyres Price Index is a base-weighted index that uses quantities from the base year and prices from the current year. Formula:
    [
    \text{Laspeyres Index} = \frac{\sum P_{\text{current}} \times Q_{\text{base}}}{\sum P_{\text{base}} \times Q_{\text{base}}} \times 100
    ]
  3. Paasche Price Index is a current-weighted index, where quantities from the current year are used. Formula:
    [
    \text{Paasche Index} = \frac{\sum P_{\text{current}} \times Q_{\text{current}}}{\sum P_{\text{base}} \times Q_{\text{current}}} \times 100
    ]
  4. Chain Index is used for computing real GDP by linking price indices over time, adjusting nominal GDP for inflation. Formula:
    [
    \text{Chain Index for Year X} = \text{Chain Index of Previous Year} \times \text{Paasche or Laspeyres Index of Year X}
    ]
  5. Real GDP uses a price index (like the Laspeyres or Paasche index) to adjust nominal GDP for inflation. This removes the effect of price changes to reflect the real growth in output.

(b) Gross Domestic Product (GDP) vs. Net National Product (NNP)

  • Gross Domestic Product (GDP) measures the total market value of all final goods and services produced within a country during a year.
  • Net National Product (NNP) adjusts GDP for depreciation (capital consumption). It subtracts the depreciation of capital goods (such as machinery and buildings) from GDP to get NNP:
    [
    \text{NNP} = \text{GDP} – \text{Depreciation}
    ]

You’ll need to find depreciation data or estimate it to calculate NNP.

(c) Impact of Trade Opening

When Elbonia opens trade with Italy and doubles its mud production to export, the following would happen:

  1. Nominal GDP would likely increase due to the export of mud. The additional mud production will increase the total output value.
  2. Net Exports would increase by the value of the mud exported. The trade balance would improve, as exports grow relative to imports.

You can calculate the value of net exports as:
[
\text{Net Exports} = \text{Exports} – \text{Imports}
]
Given that the mud is exported in exchange for 100,000 Italian tiles priced at 0.50/tile, the export revenue is:
[
100,000 \times 0.50 = 50,000
]
This would increase the net exports in 2011.

(d) Impact of Foreign Investment on Gross National Product (GNP)

If an American company buys half of the Elbonian hat-making industry, the income earned from the foreign investment will affect the Gross National Product (GNP). In GNP, you include the income generated by the country’s citizens abroad and exclude income earned by foreigners within the country.

  1. GNP is calculated as:
    [
    \text{GNP} = \text{GDP} + \text{Net income from abroad}
    ]
  2. The American company’s profit will be 10% of the sales of the hats. This profit flows to the American company, which will reduce Elbonia’s GNP.

Summary

  • Nominal GDP increases with any new production or trade.
  • Laspeyres and Paasche indices are used to calculate price changes over time, with the Laspeyres index using base-year quantities and the Paasche index using current-year quantities.
  • Chain index links indices over multiple years to adjust GDP for inflation.
  • NNP accounts for depreciation and is always less than or equal to GDP.
  • Trade opening leads to increased net exports and nominal GDP.
  • Foreign investment (like the purchase of a domestic industry) will reduce GNP because the profits flow to foreign owners.

Would you like to go over the actual calculations for the example data you have, or do you have specific values for prices and quantities in each year?

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