a) What is the definition of nominal GDP? b) How is nominal GDP converted to rea

Question

a) What is the definition of nominal GDP?

b) How is nominal GDP converted to real GDP? (Hint – consider the formula you used in part (a)).


c) Why is GDP a good measure of society's well being? Why is it a bad measure? List one reason for each and explain.

d) An economy makes ONLY two types of cars, black cars and red cars (no other goods are produced). In year 1, black cars cost $20,000 and red ones cost $10,000. 1 black car and 1 red car are produced. In year 2, red cars cost $10,000 and black ones cost $10,000. Two red cars and one black car are produced. Using year one as the base year, compute the nominal GDP in both years and real GDP in both years.


e) The GDP deflator is used to show how price changes impact nominal and real GDP measures. Compute this value for both years using the data you computed in part (d) above.


f) What is the inflation rate (percent change in price level) between year 1 and year 2?

Explanation / Answer

The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. You use a GDP deflator (usually the Consumer Price Index) c. Because more GDP usually correlates to a higher standard of living. It's very hard to get it accurate though (real GDP), so usually the estimates are off. d. nom: 30k, 30k real: 30k, 40k e. 1, 4/3 f. 4/3-1=1/3=33%

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