Question

a) Obtain the value of nominal GDP and real GDP in 2018 and 2019 for this economy.

Good	2018	2018	2019	2019
	P18	Q18	P19	Q19
Food	$1	100	$1	150
Clothing	$5	200	$1	200
Household items	$10	50	$3	60
Health Care	$40	20	$20	30

b) Explain why looking just at the evolution of nominal GDP would make an analyst erroneously conclude that this economy has gone through a severe crisis/recession in 2015

Answer 1

	2018	2019
Good	Price ($)	Quantity	Price ($)	Quantity
Food	1	100	1	150
Clothing	5	200	1	200
Household items	10	50	3	60
Health care	40	20	20	30
Nominal GDP ($)	2400	1130
Real GDP ($)	2400	2950

As the base year data is not given, let us assume 2018 to be the base year.

Nominal GDP in 2018 = P(Food) in 2018 * Q(Food) in 2018 + P(Clothing) in 2018 * Q(Clothing) in 2018 + P(Household items) in 2018 * Q(Household items) in 2018 + P(Health Care) in 2018 * Q(Health Care) in 2018

= $1 * 100 + $5 * 200 + $10 * 50 + $40 * 20 = $2,400

Real GDP in 2018 = Nominal GDP in 2018 = $2,400 (As 2018 is the bar year)

Nominal GDP in 2019 = P(Food) in 2019 * Q(Food) in 2019 + P(Clothing) in 2019 * Q(Clothing) in 2019 + P(Household items) in 2019 * Q(Household items) in 2019 + P(Health Care) in 2019 * Q(Health Care) in 2019

= $1 * 150 + $1 * 200 + $3 * 60 + $20 * 30 = $1,130

Real GDP in 2019 = P(Food) in 2018 * Q(Food) in 2019 + P(Clothing) in 2018 * Q(Clothing) in 2019 + P(Household items) in 2018 * Q(Household items) in 2019 + P(Health Care) in 2018 * Q(Health Care) in 2019

= $1 * 150 + $5 * 200 + $10 * 60 + $40 * 30 = $2,950

b. By looking at the nominal GDP data, there is a huge slump in the nominal GDP of 2019 compared to 2018 value. Therefore, one would erroneously conclude that the economy has gone into a deep recession in this period. However, a look at the real GDp values of 2018 and 2019 suggest that the real GDP(output) has actually increased in the economy(which suggests that the economy was doing fine).

The slump in nominal GDP is due to a drastic fall in the prices of goods. Therefore, looking at the nominal GDP does not give an accurate picture of the actual health of the economy as the nominal GDP is influenced largely by the price level in the economy.