Suppose the British economy produces two goods: laptops and books. The quantity

Question

Suppose the British economy produces two goods: laptops and books. The quantity produced and the prices of these items for 2010 and 2011 are shown in the table below: Year Quantities produced Price ($) Laptops 50 Books = 1000 Laptops 200 Books = ? 2010 Laptops-80 Books = ? Laptops = 100 Books = 10 2011 Instructions: Round your answer to two decimal places. a. Let's assume that the base year was 2010, so that real GDP in 2010 equals nominal GDP in 2010 If the real GDP in Britain was $16,000 in 2010, the price of books was S Instructions: Round your answer to the nearest whole number. b. Using your answer from part (a), if the growth rate in nominal GDP was 10 percent Instructions: Round your answer to one decimal place c. Using your answers from parts (a) and (b), the growth rate in real GDP between 2010 and 2011 was books must have been produced percent.

Explanation / Answer

Real GDP = Quantities produced in present year multiplied by the prices in base year

Nominal GDP = Quantities produced in present year multiplied by the prices in present year

a. Real GDP = Nominal GDP = $16,000

GDP is the ssum of the dollar value of the goods and services produced in a country.

In 2010,

Nominal GDP in 2010 = (Price of Laptops in 2010 * Quantity Produced (Laptop) in 2010) + (Price of Books in 2010 * Quantity Produced (Books) in 2010)

$16,000 = (200 * 50) + (1000 * P)

Here P = Price of books in 2010

16,000 = 10,000 + 1,000P

6,000 = 1,000P

P = $6

b.

In 2010 nominal GDP = 16,000

In 2011 nominal GDP = 16,000 * 1.1 = 17,600

As there is growth rate of 10%, i.e. there is an increase of 10%

Nominal GDP in 2011 = (Price of Laptops in 2011 * Quantity Produced (Laptop) in 2011) + (Price of Books in 2011 * Quantity Produced (Books) in 2011)

17,600 = (100 * 80) + (10 * Q)

Here Q = Quantity Produced (Books) in 2011

17,600 = 8,000 + 10Q

9,600 = 10Q

960 = Q

c.

Real GDP in 2011 = Quantities produced in 2011 multiplied by the prices in 2010

Real GDP in 2011 = (Price of Laptops in 2010 * Quantity Produced (Laptop) in 2011) + (Price of Books in 2010 * Quantity Produced (Books) in 2011)

Real GDP in 2011 = (200 * 80) + (6 * 960)

                           = 16,000 + 5,760

                           = 21,760

Real GDP in 2010 = 16,000

Change in real GDP = (New GDP - Old GDP) / Old GDP

                              = (21,760 - 16,000) / 16,000

                              = 5,760 / 16,0000

                              = 0.36 or 36%

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