Consider the following chart detailing the prices and quantities of two goods (A

Question

Consider the following chart detailing the prices and quantities of two goods (A and B) produced during three years.

Qa Qb Pa Pb

1990 10 2 5 3

2000 8 5 6 4

2010 7 10 6 5

(a) Calculate nominal GDP for all three years.

(b) Calculate real gdp for years 2000 and 2010, using 1990 as the base year.

(c) What can we say about how production changed between 1990 and the other two years? Why can we draw this conclusion?

(d) Calculate the GDP deflator for 2000 and 2010, using 1990 as the base year.

(e) Calculate the inflation rate between years 1990 and 2000, and between 2000 and 2010. (Percentage change in price levels)

(f) Has the price level increased or decreased between 1990 and 2000? What about between 2000 and 2010?

Explanation / Answer

a).

Consider the given problem here the nominal GDP be the market value of all the goods and the services produce by the country in a particular year. So, here the nominal GDP for each year is given by.

For 1990: the market value is given by “Pa*Qa+Pb*Qb = 5*10+3*2 = $56.

For 2000: the market value is given by “Pa*Qa+Pb*Qb = 8*6+5*4 = $68.   

For 2010: the market value is given by “Pa*Qa+Pb*Qb = 7*6+10*5 = $92.

So, the nominal GDP for “1990”, “2000” and “2010” are “56”, “68” and “92” respectively.

b).

Now, the real GDP be the value of all the goods and the services produce by the country in a particular year at base price. So, here the real GDP for each year is given by.

For 1990: the market value is given by “Pa*Qa+Pb*Qb = 5*10+3*2 = $56.

For 2000: the market value is given by “Pa*Qa+Pb*Qb = 8*6+5*3 = $63.   

For 2010: the market value is given by “Pa*Qa+Pb*Qb = 7*6+10*3 = $72.

So, the real GDP for “1990”, “2000” and “2010” are “$56”, “$63” and “$72” respectively.

c).

So, as we can see that in “1990” the real GDP was “$56” and it increases to “$63”, => as the real GDP increases implied the level of production increases. Similarly, from “2000” to “2010” the real GDP increases from “$63” to “$72”, => the level of production increases.

d).

As we know that the “GDP deflator” is the ratio of “Nominal GDP” to “Real GDP”. So, the “GDP deflator” for “1990” is given by, “$56/$56*100 = 100”. Similarly, the “GDP deflator” for “2000” is given by, “$68/$63*100 = 107.94”. Finally, the “GDP deflator” for “1990” is given by, “$92/$72*100 = 127.78”.

So, the “GDP deflator” for “1990”, “2000” and “2010” are given by “100”, “107.94” and “127.78” respectively.

e).

Now, the inflation from “1990” to “2000” is given by, “(107.94-100)/100*100 = 7.94%”.

Similarly, the inflation from “2000” to “2010” is given by, “(127.78-107.94)/107.94*100 = 18.38%”. So, the inflation rate for “2000” and “2010” are “7.94%” and “18.38%” respectively.

f).

Now, as the inflation rate is positive form “1990” to “2000”, => the price level increases. Similarly, as the inflation rate is positive form “2000” to “2010”, => the price level increases.

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