Real versus nominal GDP Consider a simple economy that produ

Real versus nominal GDP

Consider a simple economy that produces two goods: apples and muffins. The following table shows the prices and quantities of the goods over a three-year period.

Apples

Muffins

Use the information from the preceding table to fill in the following table.

From 2015 to 2016, nominal GDP (decreased, increased) , and real GDP (decreased, increased) .

The inflation rate in 2016 was (-12.5%, 0.1%, 12.5%, 88.9%, 112.5%) .

Why is real GDP a more accurate measure of an economy\'s production than nominal GDP?

Real GDP does not include the value of intermediate goods and services, but nominal GDP does.

Real GDP includes the value of exports, but nominal GDP does not.

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

Year	Apples	Muffins
Price	Quantity	Price	Quantity
(Dollars per apple)	(Number of apples)	(Dollars per muffin)	(Number of muffins)
2014	1	110	2	150
2015	2	155	4	215
2016	3	120	4	180

Solution

2014 Base Year

2015

2016

Quantity

Price

Value

Quantity

Price

Value

Quantity

Price

Value

Apples

110

1

110

155

2

310

120

3

360

Muffins

150

2

300

215

4

860

180

4

720

Nominal GDP

410

1170

1080

2015

2016

Quantity

Price of 2014

Value

Quantity

Price

Value

155

1

155

120

1

120

215

2

430

180

2

360

REAL GDP

585

480

Year

Nominal GDP

Real GDP

GDP Deflator

(Dollars)

(Base year 2014, dollars)

2014

410

410

100

2015

1170

585

200

2016

1080

480

225

From 2015 to 2016, nominal GDP decreased, and real GDP decreased.

The inflation rate in 2016 was 12.5%

Inflation = 225 – 200 / 200 * 100 = 12.5%

Why is real GDP a more accurate measure of an economy\'s production than nominal GDP?

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

	2014 Base Year	2015	2016
	Quantity	Price	Value	Quantity	Price	Value	Quantity	Price	Value
Apples	110	1	110	155	2	310	120	3	360
Muffins	150	2	300	215	4	860	180	4	720
	Nominal GDP		410			1170			1080