Use the data in the following tables for an economy that produces only two thing

Question

Use the data in the following tables for an economy that produces only two things, bread and computers. Assume that all production is consumed in each year:

Year 1

Good Qty Price

Bread 30 $10

Computers 10 $50

Year 2

Good Qty Price

Bread 40 $15

Computers 15 $60

Using Year 1 as the base year, and without chain weighting, approximately how much did nominal and real GDP, respectively, grow between year 1 and year 2?

A. Nominal, 43.75%; Real, 42.86%

B. Nominal, 87.5%; Real, 43.75%

C. Nominal, 80.5%; Real, 60.5%

D. Nominal, 60.5%; Real, 80.5%

A. Nominal, 43.75%; Real, 42.86%

B. Nominal, 87.5%; Real, 43.75%

C. Nominal, 80.5%; Real, 60.5%

D. Nominal, 60.5%; Real, 80.5%

Explanation / Answer

Answer: First we will calculate nominal and real GDP for both the years then we will compare the growth rate in both the years.

Year 1   

Year 2

Calculation of Nominal and Real GDP:

Nominal GDP is calculated as the final goods and services evaluated at current year prices for each year and Real GDP is calculated as the final goods and services evaluated at base year prices. In this question Year 1 as the base year.

Year 1

Nominal GDP Year 1 = Quantity(Year 1) x Price (Year 1) Bread +

                                  Quantity(Year 1) x Price (Year 1) Computers

Nominal GDP Year 1 = ( 30 x 10) + ( 10 x 50)

Nominal GDP Year 1 = $800

Real GDP Year 1 = Quantity(Year 1) x Price (Year 1) Bread +

                            Quantity(Year 1) x Price (Year 1) Computers

Real GDP Year 1 = ( 30 x 10) + ( 10 x 50)

Real GDP Year 1 = $800

Year 2

Nominal GDP Year 2 = Quantity(Year 2) x Price (Year 2) Bread +

                                  Quantity(Year 2) x Price (Year 2) Computers

Nominal GDP Year 2 = ( 40 x 15) + ( 15 x 60)

Nominal GDP Year 2 = $1500

Real GDP Year 2= Quantity(Year 2) x Price (Year 1) Bread +

                            Quantity(Year 2) x Price (Year 1) Computers

Real GDP Year 2 = ( 40 x 10) + ( 15 x 50)

Real GDP Year 2 = $1150

Growth rate in Nominal and Real GDP Between Year 1 and 2

Growth rate in nominal GDP = Year 2 - Year 1 / Year 1 x 100 = 87.5%

Growth rate in real GDP = Year 2 - Year 1 / Year 1 x 100 = 43.75%

Answer : B. Nominal, 87.5%; Real, 43.75%

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