Question

Given below are the money NNP and Price Index \((1929\) base) for 1929 and \(1933:\) $$ \begin{array}{llc} & \begin{array}{l} \text { Money NNP } \\ \text { (billions of current dollars) } \end{array} & \begin{array}{c} \text { Price } \\ \text { Index } \end{array} \\ 1929 & \$ 96 & 100 \\ 1933 & \$ 48 & 75 \end{array} $$ a) What is the real NNP in 1933 using 1929 as a base? b) What is the real NNP in 1929 using 1933 as a base?

Short answer

a) The real NNP in 1933 using 1929 as a base is \$64 billion. b) The real NNP in 1929 using 1933 as a base is \$72 billion.

Step-by-step solution

To find the real NNP in 1933 using 1929 as a base, we will use the formula mentioned above: \( Real \ NNP = \frac{Money \ NNP \times Base \ Year \ Price \ Index}{Other \ Year \ Price \ Index} \) Plugging in the values: \( Real \ NNP_{1933} = \frac{48 \times 100}{75} \) Calculating the value: \( Real \ NNP_{1933} = \$ 64 \ billion \) The real NNP in 1933 using 1929 as a base is $64 billion. #b) Real NNP in 1929 using 1933 as a base#

To find the real NNP in 1929 using 1933 as a base, we will again use the formula: \( Real \ NNP = \frac{Money \ NNP \times Base \ Year \ Price \ Index}{Other \ Year \ Price \ Index} \) This time, we have: \( Real \ NNP_{1929} = \frac{96 \times 75}{100} \) Calculating the value: \( Real \ NNP_{1929} = \$ 72 \ billion \) The real NNP in 1929 using 1933 as a base is $72 billion.

Key concepts

Price Index

The Price Index is a crucial tool in economics, used to measure the average change in prices over time. This helps economists and analysts to adjust the economic value from different years, taking into account the effect of inflation.
The Price Index is often expressed as a percentage reflecting how much prices have increased or decreased when compared to a base year. In our exercise, the Price Index for 1929 is given as 100 since it is used as the base year, which means there is no change in prices from itself.
To calculate changes in real economic figures across different years, it's essential to use the Price Index of both the year in question and the base year. This allows the values to be adjusted for any inflation or deflation that may have occurred. When comparing data from different years, the Price Index helps ensure that the comparisons are on the same economic grounds.

Base Year

The Base Year is a specific year used as a reference point for economic analysis. It serves as the benchmark or the "zero point" from which economic data, like the Price Index, are compared.
This concept is essential in understanding inflation-adjusted economic statistics. When calculating real values, like Real NNP, the base year Price Index is used as a standard to evaluate the effect of price changes over time. In our exercise, 1929 is set as the base year when calculating the Real NNP for 1933, and vice-versa for the other calculation.
Making one particular year a standard allows us to more precisely observe economic trends, inflation, deflation, and other critical economic activities relative to the base year.

Money NNP

Money NNP, or Money Net National Product, represents the total market value of goods and services produced by a country's residents in a specific time, not adjusted for inflation or price changes. It is also often referred to as Nominal NNP.
The values are presented in the currency of the time, known as current dollars. In our exercise, the Money NNP for 1929 was $96 billion, and for 1933, it was $48 billion. These figures, however, do not address the changes in the purchasing power of the currency due to inflation or deflation which can mislead economic analysis if considered in isolation.
Understanding Money NNP allows analysts to first grasp the comprehensive economic output in its unadjusted form, before making necessary adjustments for a full assessment of economic performance.

Economic Analysis

Economic Analysis is essential in understanding economic activities by evaluating data and trends. This practice involves analyzing key economic indicators, one of which is Real NNP.
Real NNP helps in understanding an economy's actual performance by adjusting the Money NNP using price indices to not be misled by inflation or deflation. Through the exercise, you saw how Real NNP was calculated with the formula involving Money NNP and Price Indices of varying years for accurate comparison.
Through economic analysis, policymakers, businesses, and researchers can make more informed decisions. It provides a clearer picture of economic health and guides strategy formation, whether it involves setting monetary policies, planning public expenditure, or making business investment considerations.