Q5You are provided with the following data assume the two i

Q5You are provided with the following data – assume the two items produced by an economy are movies and popcorn.   Quantities and prices of these goods for the last several years are shown below. The base year is 2014.

                                                    Prices and Quantities

Year

Price of

Movies

Quantity of Movies

Price of Popcorn

Quantity of

Popcorn

2014

$10.00

400

$5

800

2015

$11.00

500

$4

900

2016

$12.00

600

$5

1000

2017

$12.00

600

$6

900

Using this information, answer the following 4 questions:

(a) Calculate nominal GDP for each of the years.

(b) Calculate real GDP for each of the years.

(c) Calculate economic growth for 2015, 2016 and 2017.

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Solution

Answer : a) Nominal GDP = Current price level * Current quantity level.

For 2014 : Nominal GDP = (10*400) + (5*800) = 4000 + 4000 = 8,000

For 2015 : Nominal GDP = (11*500) + (4*900) = 5,500 + 3,600 = 9,100

For 2016 : Nominal GDP = (12*600) + (5*1000) = 7,200 + 5,000 = 12,200

For 2017 : Nominal GDP = (12*600) + (6*900) = 7,200 + 5,400 = 12,600

b) Real GDP = Base year price level * current year quantity level [ Base year is 2014, given ]

For 2014 :    Real GDP = (10*400) + (5*800) = 4000 + 4000 = 8,000

For 2015 :   Real GDP = (10*500) + (5*900) = 5,000 + 4,500 = 9,500

For 2016 :    Real GDP = (10*600) + (5*1000) = 6,000 + 5,000 = 11,000

For 2017 : Real GDP = (10*600) + (5*900) = 6,000 + 4,500 = 10,500

c) Economic Growth = [ (Current year real GDP - Previous year real GDP) / Previous year real GDP ] * 100

For 2015 : Economic Growth = [ (9,500 - 8,000) / 8,000 ] * 100 = 18.75 %

For 2016 : Economic Growth = [ (11,000 - 9,500) / 9,500 ] * 100 = 15.79 %

For 2017 : Economic Growth = [ (10,500 - 11,000) / 11,000 ] * 100 = - 4.55 %

Therefore, for year 2017 the growth rate is negative.