5. Real versus nominal GDP Consider a simple economy that produces two goods: cu

Question

5. Real versus nominal GDP Consider a simple economy that produces two goods: cupcakes and envelopes. The following table shows the prices and quantities of the goods over a three-year period Cupcakes Envelopes Price Quantity (Number of cupcakes) 125 135 100 Price Year 2013 2014 2015 Quantity (Number of envelopes) 155 210 200 (Dollars per cupcake) (Dollars per envelope) 4 5 4 Use the information from the preceding table to fill in the following table Nominal GD Real GDP Year(Dollars) 2013 2014 2015 (Base year 2013, dollars) GDP Deflator From 2014 to 2015, nominal GDP and real GDP The inflation rate in 2015 was Why is real GDP a more accurate measure of an economy's production than nominal GDP? Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and servicés an écónomy consumes Real GDP is not influenced by price changes, but nominal GDP is Real GDP includes the value of exports, but nominal GDP does not.

Explanation / Answer

year 2013

nominal gdp = 125 + (155*2) = 435

real gdp = 435

gdp deflator = 100 %

year 2014

nominal gdp = (135*2 ) + (210*4) = 1110

real GDP ( base price is 2013 ) = 135 + (210*2) = 555

gdp deflator = 1110 / 555 *100 = 200%

year 2015

nominal gdp = 500 + 800 = 1300

real gdp = 100 +400 = 500

gdp deflator = 1300 /500 *100 = 260%

b)

from 2014 to 2015 , nominal gdp was = 1110 and real gdp = 550

inflation rate in 2015 was =

infaltion rate = gdp deflator in year 2015 - deflator in year 2014 / gdp deflaor in 2014 *100

inflation rate = 260 - 200 / 200 = 0.3%

c) Real GDP is not influenced by price change , but nominal GDP is.

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