Suppose that in the country of Utopia annual production and

Suppose that in the country of Utopia, annual production and prices in 2008 and 2009 for this three- good economy are as follows:

Production Q2008

Price P2008

Production Q2009

Price P2009

Milk (Million liters)

2

$5

3

$6

Meat (Million kg)

3

$10

2

$12

Apples (Million kg)

1

$2

2

$3

a) Calculate nominal GDP for each year.

b) Using 2008 as the base year, calculate real GDP for each year.

c) Calculate the growth rate in real GDP between 2008 and 2009 (round at two decimal points). [Hint: to calculate the growth rate, use [(real GDPyear2 – real GDPyear1)/ real GDPyear1]x100

d) Calculate the GDP deflator for 2009 (round to two decimal places).

Solution

a)2008:

Nominal GDP=Q2008P2008 (add for all 3 goods)

=2(5)+3(10)+1(2)=42

2009:

Nominal GDP=Q2009P2009 (add for all 3 goods)

=3(6)+2(12)+2(3)=48

b.)2008 is base year

We take prices of base year for real GDP

Real GDP for 2008=P2008Q2008 (add for all 3 goods)

=2(5)+3(10)+1(2)=42

Real GDP FOR 2009=P2008Q2009 (add for all goods)

=5(3)+10(2)+2(2)=39

c.)Growth rate in real GDP between 2008 and 2009=[real GDP2009 – real GDP2008)/ real GDP2008]x100

=[(39-42)/42](100)

= -7.14%

d.)Gdp deflator for 2009=[Nominal GDP for 2009/Real GDP for 2009](100)

= [48/39](100)=123.07