Question

2. Nominal and Real Output

Consider an economy whose sole final product is maple syrup. The following table contains data on its maple syrup output (in liters) and price (in dollars per liter).

Year	Quantity	Price
2012	129.41	$10.86
2013	131.58	$11.06
2014	134.42	$11.28
2015	136.44	$11.41
2016	139.91	$11.52

a) For each year, compute nominal GDP. What is the growth rate of nominal GDP in 2016?

b) For each year, compute real GDP in 2012 dollars. Using this measure, what is the real GDP growth rate in 2016?

c) For each year, compute real GDP in 2014 dollars. Using this measure, what is the real GDP growth rate in 2016?

d) Which growth rate is higher, and why? Which growth rate is a more informative measure of economic performance, and why?

Answer 1

a) Growth rate in 2016 = (Nominal GDP in 2016 - Nominal GDP in 2015)/Nominal GDP in 2015 x 100

= (1611.7632 - 1556.7804)/1556.7804 x 100 = 3.53%

b) Real GDP in 2012 = Price in 2012 x Quantity in current year

Real GDP growth in 2016 = (Real GDP in 2016 - Real GDP in 2015)/Real GDP in 2015 x 100

= (1519.4226 - 1481.7384)/1481.7384 x 100 = 2.54%

c) Real GDP in 2014 = Price in 2014 x Quantity in current year

Real GDP growth in 2016 = (Real GDP in 2016 - Real GDP in 2015)/Real GDP in 2015 x 100

= (1578.1848 - 1539.0432)/1539.0432 x 100 = 2.54%

d) Nominal growth rate is higher because it is based on current prices. Nominal GDP is more informative measure of economic performance.