3 Suppose an economy produces only one good In the base year

3. Suppose an economy produces only one good In the base year (2000), production was 8 units at a price of $10 each. The next year, production increased to 9 units and the price of the good increased to $12 a. b. Find nominal GDP in years 2000 and 2001. If the price index is 100 in the base year, what is the value of the price index in year 2001? c Find real GDP in year 2001 Suppose a hypothetical national economy can be represented by the following data: Nominal Price Index Real YearGDP (2000-100) GDP 2007 $1536128 2008 $1663132 2009 2010 $1792 135 $1274 140 Find real GDP in years 2007, 2008, and 2010, Find nominal GDP in year 2009 d. e.

Solution

a.

Nominal GDP in 2000 = market value of goods and services at current market price

=$10*8

=$80

Nominal GDP in 2001 =  market value of goods and services at current market price

=$12*9

=$108

b.

The price index for the base year is $100.

The price index for the next year will be= Price of goods in the base year* Quantity of goods produced in the current year.

=$10*9

=$90

The price index for the next year will be

= (Cost of basket in the current year / cost of basket in the base year)*100

=(108/90)*100

=120%

c.

Real GDP in 2001=( Nominal GDP in 2001/ price index of 2001)*100

=(108/120)*100

=$90

d.

Real GDP of 2007 = (Nominal GDP of 2007/ price index of 2007)*100

=($1536/128)*100

=12*100

=$1200

Real GDP of 2008 = (Nominal GDP of 2008/ price index of 2008)*100

=($1663/132)*100

=12*100

=$1259.84

Real GDP of 2010 = (Nominal GDP of 2010/ price index of 2010)*100

=($1792/140)*100

=12*100

=$1280

(e)

Real GDP of 2009 = (Nominal GDP of 2009/ price index of 2009)*100

$1274 = (Nominal GDP of 2009/135)*100

The nominal GDP of 2009 = (1274*135)/100

=$1719.9