5 Real versus nominal GDP Consider a simple economy that pro

5. Real versus nominal GDP Consider a simple economy that produces two goods: pens and oranges. The following table shows the prices and quantities of the goods over a three-year period Pens Oranges Year 2014 2015 2016 Price (Dollars per pen) 2 4 Quantity (Number of pens) 125 135 125 Price (Dollars per orange) 3 Quantity (Number of oranges) 155 210 165

Solution

Nominal GDP=P1*Q1+P2*Q2

REAL GDP=P base year*Quantity current year

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

From 2015 to 2016 the nominal GDP fell and the real GDP fell

Inflation rate=(GDP deflator in 2016-GDP deflator in 2015/GDP deflator in 2015)*100

Inflation rate-(100-130/130)*100=-23%

Real GDP is a better measure because-

Real GDP is adjusted for price change while Nominal GDP is not.

Answer-Second option

	Pens		Oranges
	Price	Quantity	price	Quantity	Nominal GDP	Real GDP	GDP deflator
Year
2014	2	125	3	150	700	-
2015	4	135	3	210	1170	900	130
2016	2	125	3	165	745	745	100