5 Real versus nominal GDP Consider a simple economy that pro

5. Real versus nominal GDP Consider a simple economy that produces two goods: pencils and oranges. The following table shows the prices and quantities of the goods over a three-year period. Pencils Oranges Price (Dollars per pencil) 2 4 Quantity (Number of pencils) 115 150 100 Quantity (Number of oranges) 175 180 160 Price (Dollars per orange) Year 2012 2013 2014 2

Solution

Ans:

1) Nominal GDP

2012 = (115 * $2) + ($5 * 175)

= $230 + $875

= $1105

2013 = (150 * $4) + (180 * $2)

= $600 + $360

= $960

2014 = (100 * $1) + (160 * $2)

= $100 + $320

= $420

2) Real GDP

2012 = (115 * $2) + ($5 * 175)

= $230 + $875

= $1105

2013 = (150 * $2) + (180 * $5)

= $300 + $900

= $1200

2014 = (100 * $2) + (160 * $5)

= $200+ $800

= $1000

3) GDP Deflator

2012 = $1105 / $1105

= 100

2013 = $960 / $1200

= 80

2014 = $420 / $1000

= 42

4) Decreased,Decreased

From 2013 to 2014, nominal GDP decreased and real GDP decreased.

5) Inflation rate in 2014 = ($420 - $1000) / $420

= -1.38 or -138%

6) Real GDP is not influenced by price changes, but nominal GDP is.