In an economy, there are only two goods (Cars and cycles) produced. The data for last...

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

Solutions

Expert Solution

The GDP or Gross Domestic Product is the value of total output in a given period. The nominal GDP can be calculated using the current output and current prices. However, the real GDP is calculated by taking into account current output but base year prices.
2017 Nominal and Real GDP will be same.
(1000 * 10) + (200 * 900) = 190000

2018 - Nominal GDP
(1200 * 15) + (210 * 1000) = 228000
2018 - Real GDP
(1000 * 15) + (1000 * 200) = 215000

We can create table for the values here.

GDP Deflator can be calculated using following formula
GDP Deflator = (Nominal GDP / Real GDP) * 100

Year	Price of Car	Production	Price of Cycle	Production	Nominal GDP	Real GDP	GDP Deflator
2017	1000	10	200	900	190000	190000	100.00
2018	1200	15	210	1000	228000	215000	106.05
2019	1500	25	250	1500	412500	325000	126.92

Inflation can be calculated using GDP Deflator numbers
(Current Year Deflator / Previous Year or Base Year Deflator) - 1

2018,
(106.05 / 100) - 1 = 0.0605 or 6.05%

2019,
(126.92 / 106.05) - 1 = 0.1968 or 19.68%

2019 inflation wrt base year
(126.92 / 100) - 1 = 0.2692 or 26.92%

Annual in 2019 wrt to base year.
(126.92 / 100) ^ 0.5 = 1.1266
(1.1266 - 1) * 100 = 12.66%

Rahul Sunny answered 2 months ago

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