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Exercise 1.2 CPM 3 Fred Thompson

Exercise 1.2 CPM 3 Fred Thompson. Question 2-a Compute the growth rates for defense and non-defense outlays in current-year dollars from 1990 to 1996. Divide that growth into its real and price components.

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Exercise 1.2 CPM 3 Fred Thompson

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  1. Exercise 1.2CPM 3Fred Thompson

  2. Question 2-aCompute the growth rates for defense and non-defense outlays in current-year dollars from 1990 to 1996. Divide that growth into its real and price components. • For the entire period 1990-1996, defense outlays in current (nominal) year dollars grew –11.4% and non-defense outlays 34%. • Real growth in defense outlays was –25.5% and the price component was 19%. • Real growth in non-defense outlays was 13% and the price component 18.6%.

  3. Exhibit 1.

  4. Growth rate (average annual rate of growth) for defense and non-defense outlays in current year dollars, can be found using the following formula: R = [ (Y/X) ^(1/N)] –1 • where: • R = the growth rate, • Y = the end value, • X = the beginning value, and • N= the number of periods of growth.

  5. Solution Therefore the nominal growth rate for defense outlays is: R[nominal] = [(266.0/300.1)^(1/6)] –1 = .8866371211/6 – 1 = -.02 or -2.0% The real rate is: R [real] = (242/325)1/6 – 1 = -. 048 or –4.8% Subtracting the real rate from the nominal rate yields the rate of inflation: -. 048 –(- .02) = .028

  6. Solution (cont.) The nominal growth rate for non-defense outlays is: R [nominal] = [(268.4/200.3)^(1/6)] –1 = 1.04996-1 = .05 or 5.0% The real rate is: R [real] = (244/216)1/6 – 1 = .02 or 2% Subtracting the real rate from the nominal rate yields the rate of inflation: .05 - .02 = .03

  7. Question 2-b What was the real dollar (1992=100) change in defense outlays from 1990 to 1996? Convert the base to 1996=100 and recalculate that increase. Which of the two base years is more correct? Compute and compare the real percentage increases using the two different base years

  8. Answer The real dollar change in defense outlays from 1990 to 1996 was –25.5%, calculated with 1992 as a base year. Exhibit 2 shows calculations for the real dollar change between 1990 if 1996 is taken as a base year. This yields the identical real dollar decrease of 25.5%.

  9. Exhibit 2.

  10. Question 2-c Suppose prices are expected to change between 1996 and 2000 at the same rate they did between 1990 and 1996. What level of defense and non-defense outlays would leave real purchasing power the same in 2000 as in 1996? D 266 (1+ .028)4 = $297 in year 2000 ND 268.4 (1+ .03)4 = $302 in year 2000

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