Real versus nominal GDP Consider a simple economy that produces two goods: apple
ID: 1202982 • Letter: R
Question
Real versus nominal GDP
Consider a simple economy that produces two goods: apples and muffins. The following table shows the prices and quantities of the goods over a three-year period.
Apples
Muffins
Use the information from the previous table to fill in the following table.
From 2009 to 2010, nominal GDP (decreased or increased), and real GDP (decreased or increased).
Why is real GDP a more accurate measure of an economy's production than nominal GDP?
1. Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and services an economy consumes.
2. Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.
3. Real GDP is not influenced by price changes, but nominal GDP is.
YearApples
Muffins
Price Quantity Price Quantity (Dollars per apple) (Number of apples) (Dollars per muffin) (Number of muffins) 2008 1 150 2 160 2009 2 135 4 230 2010 3 110 4 165Explanation / Answer
Nominal GDP is given by the product of Current year Price * Current year Quantity.
2008 - 1 *150 + 2 * 160 = $470
2009 - 2 * 135 + 4 * 230 = $ 1190
2010- 3 * 110 + 4 * 165 = $990
Real GDP = Base Year Price * Curent Year Quantity
2008 = 1 *150 + 2 * 160 = $470
2009 = 1 * 135 + 2 * 230 =$ 595
2010 = 1 * 110 + 2 * 165 = $440
1. From 2009 to 2010, both nomminal and real GDP has decreased.
Answer 2:
Option 3, Real GDP is adjusted for inflation while Nominal GDP is not.
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