1. Explain why ‘overpaid’ government employees will lead to an overstatement of GDP, whereas ‘overpaid’ private sector employees will not (see Appendix 1.A).
2. Consider an economy that produces bananas and bread. You have the following measurements:
(a) Compute the GDP in each year using current prices. Compute the growth rate in nominal GDP.
(b) Compute the real GDP in each year first using 2003 as the base year and then using 2004 as the base year. How does the rate of growth in real GDP depend on which base year is used? Explain. (Hint: note that the price of bread relative to bananas has increased).