Question

1. In an economy, there are only two goods (Cars and cycles) produced. The data for last three years is given in the below table. Calculate the nominal and real GDP of three years and then find the GDP deflator for all the three years. Find year on year (YoY) inflation for 2018 and 2019. Note: the base year for this economy is given as 2017.

year	Price of Car(AED)	Number of Car	Price of cycle (AED)	Number of cycle
2017	1000	10	200	900
2018	1200	15	210	1000
2019	1500	25	250	1500

Answer 1

The base year of economy is 2017.

Year 2017

Calculate the nominal GDP -

Nominal GDP = [Quantity of cars in 2017 * Price of cars in 2017] + [Quantity of cycles in 2017 * Price of cycles in 2017]

Nominal GDP = [10 * 1000] + [900 * 200]

Nominal GDP = 10,000 + 180,000

Nominal GDP = 190,000

The nominal GDP in 2017 was AED190,000

In base year, nominal GDP equals real GDP

So,

The real GDP in 2017 was AED190,000

In base year, the value of GDP deflator is always 100.

The GDP deflator for 2017 was 100

Year 2018

Calculate the nominal GDP -

Nominal GDP = [Quantity of cars in 2018 * Price of cars in 2018] + [Quantity of cycles in 2018 * Price of cycles in 2018]

Nominal GDP = [15 * 1200] + [1000 * 210]

Nominal GDP = 18,000 + 210,000

Nominal GDP = 228,000

The nominal GDP in 2018 was AED228,000

Calculate the real GDP -

Real GDP = [Quantity of cars in 2018 * Price of cars in 2017] + [Quantity of cycles in 2018 * Price of cycles in 2017]

Real GDP = [15 * 1000] + [1000 * 200]

Real GDP = 15,000 + 200,000

Real GDP = 215,000

The real GDP in 2018 was AED215,000

Calculate the GDP deflator for 2018 -

GDP deflator = [Nominal GDP/Real GDP] * 100

GDP deflator = [228,000/215,000] * 100

GDP deflator = 106.05

The GDP deflator for 2018 was 106.05

Year 2019

Calculate the nominal GDP -

Nominal GDP = [Quantity of cars in 2019 * Price of cars in 2019] + [Quantity of cycles in 2019 * Price of cycles in 2019]

Nominal GDP = [25 * 1500] + [1500 * 250]

Nominal GDP = 37,500 + 375,000

Nominal GDP = 412,500

The nominal GDP in 2019 was AED412,500

Calculate the real GDP -

Real GDP = [Quantity of cars in 2019 * Price of cars in 2017] + [Quantity of cycles in 2019 * Price of cycles in 2017]

Real GDP = [25 * 1000] + [1500 * 200]

Real GDP = 25,000 + 300,000

Real GDP = 325,000

The real GDP in 2019 was AED325,000

Calculate the GDP deflator for 2019 -

GDP deflator = [Nominal GDP/Real GDP] * 100

GDP deflator = [412,500/325,000] * 100

GDP deflator = 126.92

The GDP deflator for 2019 was 126.92

Calculate the inflation rate in 2018 -

Inflation rate = [(GDP deflator in 2018 - GDP deflator in 2017)/GDP deflator in 2017] * 100

Inflation rate = [(106.05 - 100)/100] * 100 = 6.05%

The inflation rate in 2018 was 6.05%

Calculate the inflation rate in 2019 -

Inflation rate = [(GDP deflator in 2019 - GDP deflator in 2018)/GDP deflator in 2018] * 100

Inflation rate = [(126.92 - 106.05)/106.05] * 100 = 6.05%

The inflation rate in 2019 was 19.68%