Question

In: Economics

Below are some data from the land of milk and honey year price of milk quantity...

Below are some data from the land of milk and honey

year price of milk quantity of milk price of honey quantity of honey
2016 $1 100 quarts $2 50 quarts
2017 1 200 2 100
2018 2 200 4 100

a. compute nominal GDP, real GDP, and the GDP deflator for each year, using 2016 as the base year

b. compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2017 and 2018 from the preceding year. For each year, identify the variable that does not change. Explain why your answer makes sense.

c. Did economic well-being increase more in 2017 or 2018, explain

Solutions

Expert Solution

Given some data from the land of milk and honey

a) Nominal GDP=total value of all goods and services produced in an economy which is equal to sum of current year price*current year quantity.

2016: 1*100 + 2*50=$200

2017: 1*200 + 2*100=$400

2018: 2*200 + 4*100=$800

Real GDP is calculated by holding the prices constant by selecting a base year for it and and calculate GDP using those prices instead using the same year prices.Here, 2016 is the base year

2016: 1*100+2*50=$200

2017: 1*200+2*100=$400

2018: 1*200+2*100=$400

GDP Deflator is equal to (Nominal GDP/Real GDP)*100

2016:100 as 2016 is the base year so calculations needed here.

2017: (400/400)*100=100

2018: (800/400)*100=200

b) Percentage change in Nominal GDP can be calculated as follows:(nomial GDP of current year-nominal GDP of last year/nominal GDP of last year)*100.So,

2017: (400-200/200)*100=100%

2018: (800-400/400)*100=100%

Percentage change in real GDP would be calculated in the same manner. So,

2017:(400-200/200)*100=100%

2018: (400-400/400)*100=0%

Percentage change in GDP Deflator

2017: (100-100/100)*100=0%

2018: (200-100/100)*100=100%

Output level did not change from 2017 to 2018 so percentage change in real GDP is zero in 2018. Similarly price did not change from 2017-2018 so percentage change in GDP Deflator is zero.

c) economic well being rose well in 2017 since the price didnt increase whereas the production increased in 201, which is an indication of economic growth
But in 2018 price increased whereas production didnt increase.

Rahul Sunny answered 2 years ago
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