Question

1.Three goods are produced and consumed in an economy during years 1 and 2. The table shows prices (P1 and P2) for each good and the quantities produced (Q1 and Q2) for each good. The base year is year 1. Good P1 Q1 P2 Q2 Milk (gallons) $4.10 40 $4.20 50 Beef (pounds) $1.90 20 $2.20 25 Carrots (bags) $4.50 10 $4.80 15 Enter numbers rounded to two decimal places in each blank.

Real GDP in year 1 is $ . Real GDP in year 2 is $ .

2.

A country has nominal GDP equal to $216.18 billion in 2018. The GDP deflator in 2018 has a value of 110.42. What was the value of real GDP, in billions of dollars.

Round to two decimal places. If your answer is 3.2 billion then just enter 3.2.

Answer 1

1. Real GDP in year 1 is $247.00 . Real GDP in year 2 is $320.00

2. Value of Real GDP 195.78

Explanation:-

Nominal GDP measures productivity at current prices

Nominal GDP_{current year} = Σ (Output_{current year} * Price_{current year})

Real GDP measure of productivity that is not affected by rising prices.

Real GDP_{current year} = Σ (Output_{current year} * Price_{base year})

Compute GDP year 1

Nominal GDP_{year 1} = ($4.10 * 40) + ($1.90 * 20) + (4.50 * 10) = $164.00 + $38.00 + $45.00 = $247.00

Real GDP_{year 1} = ($4.10 * 40) + ($1.90 * 20) + (4.50 * 10) = $164.00 + $38.00 + $45.00 = $247.00

Year 1 is base year thus, Nominal GDP_{year 1} = Real GDP_{year 1}

Compute GDP year 2

Nominal GDP_{year 2} = ($4.20 * 50) + ($2.20 * 25) + (4.80 * 15) = $210.00 + $55.00 + $72.00 = $337.00

Real GDP_{year 2} = ($4.10 * 50) + ($1.90 * 25) + (4.50 * 15) = $205.00 + $47.50 + $67.50 = $320.00

Year 1 is base year, thus Real GDP_{year 2} is computed at Year 1 prices

2. Compute Read GDP in 2018

The GDP Deflator compares the nominal GDP with real GDP for a given year.

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

Nominal GDP equal to $216.18 billion

The GDP deflator = 110.42.

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

               = ($216.18 / 110.42) * 100

               = $195.78 billion

Value of Real GDP 195.78