Curiosity 2.4: What Level of Inflation Should We Aim For?

		N13. If GDP increases in nominal terms from $600 billion in 1994 to $663 billion in 1996 and the price index (1992 = 100) rises from 120 to 130, how much real growth (in 1992 dollars) in GDP occurred between 1994 and 1996?

		N14. Suppose that last year the price index (base year 1992) was 119 and income was $900 billion. The corresponding numbers for this year are 123 and $950 billion.

		a. What is this year's income expressed in 1992 dollars?

		b. What was inflation this year?

		c. What was real growth this year?

		N15. At my university tuition in 1972 was $15 per credit hour, and in 1999 it was $77 per credit hour. The CPI was 26.1 in 1972 and 110.9 in 1999 (1992 = 100). What was the 1972 tuition in 1999 dollars?

		N16. Suppose that in 1995 the price index (base year 1992) was 120 and income was $760 billion. The corresponding numbers for 1996 are 125 and $820 billion. What is 1996 income expressed in 1995 dollars?

		Appendix 2.1 Measuring GDP by Adding Up Incomes

		Since with only a few exceptions every dollar of output produced makes its way into someone's pocket as income, it should be possible to measure GDP by adding up all incomes and making a few adjustments for the exceptions. This is the thinking that lies behind the adding-up-incomes approach to measuring GDP, an alternative to the adding-up-expenditures approach.

		Incomes are placed into five categories, compensation of employees (about 74 percent of incomes), proprietors' incomes (about 8.5 percent), corporate profits (about 8 percent), interest incomes (about 9 percent), and rental incomes (about 0.1 percent). Only interest payments associated with productive activity are included; interest on government bonds and consumer loans is not included. These incomes are added and then the following four adjustments are made:

		1. Depreciation. Firms set aside earnings to cover depreciation of their buildings and equipment; this part of output produced never makes it into anyone's pocket as income and so must be added on.

		2. Indirect taxes. Firms may pay indirect taxes to the government such as sales taxes. This part of output produced does not make it into anyone's pocket as income and so must also be added on.

		3. Subsidies. Some firms might receive subsidies from the government, in which case the income they earn is overstated. Some of their income does not correspond to output pro-