Task 4 Lets assume only notebooks hats and dishwashers are p

Task 4. Let\'s assume only notebooks, hats, and dishwashers are produced within small national economy. Year 2015 Year 2016 euro Quantity Price, euroQuant Notebooks Hats Dishwashers 6000 300 14 5000 270 16 15 10 300 200 If the year 2015 is set as a base year, calculate for both periods: a) Nominal and Real GDP b) GDP deflator, and explain its meaning. c) Inflation rate, and explain its meaning; d) Rate of economic growth and explain the result.

Solution

a) Nominal GDP for 2015 = 5 * 6000 + 15 * 300 + 300 * 14

Nominal GDP for 2015 = 38,700

Real GDP for 2015 is same as nominal GDP i.e. 38,700

Nominal GDP for 2016 = 3 * 5000 + 10 * 270 + 200 * 16

Nominal GDP for 2016 = 20,900

Real GDP for 2016 = 5 * 5000 + 15 * 270 + 300 * 16

Real GDP for 2016 = 33,850

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b) GDP deflator = (Nominal GDP / Real GDP) * 100

GDP deflator 2015 = ( 38,700 / 38,700) * 100

GDP deflator 2015 = 100

GDP deflator 2016 = ( 20,900 / 33,850 ) * 100

GDP deflator 2016 = 61.74

GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP .

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c) Inflation rate in 2016 = (GDP deflator in 2016 - GDP deflator in 2015) / GDP deflator in 2015

Inflation rate in 2016 = ( 61.74 - 100) / 100

Inflation rate in 2016 = -38.26%

Inflation rate is the percentage level in price level from one period to another

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Rate of economic growth = (Real GDP in 2016 - Real GDP in 2015 ) / Real GDP in 2015

Rate of economic growth = ( 33,850 - 38,700) / 38,700

Rate of economic growth = - 12.53 %

Thus the economic growth has declined in year 2016 compared to year 2015.