Question

The following two tables are used in all the following questions. Thus, part of the following questions involve determining exactly what you need for each question. Please assume that for GDP calculations, only two things are produced in this economy: houses (a good) and dog walking (a service). Please ignore coffee for the GDP calculations. Also, assume that 2018 is the base year for GDP calculations. The base year for the CPI is not given.

Year	Houses Produced (millions)	Average House Price	Dogs Walked (millions)	Average Dog Walking Fee
2018	1.00	$200,000	1,000	$25.00
2019	1.01	$208,000	1,010	$25.10

Year	Nominal price of a cup of coffee	CPI	CPI Market Basket	Nominal interest rate on a car loan
1989	$1.70	180	$28,800	5%
1999	$1.85	200	$32,000	3%
2009	$1.95	220	$35,200	2%
2018	$1.98	245	$39,200	5%
2019	$2.00	250	$40,000	6%

Without making a calculation, which did you think increased more from 2018 to 2019 -- real or nominal GDP? Why?

Finally, for this and the following short-answer questions, please fully explain your answer and show all computations.

Answer 1

Nominal GDP is the GDP calculated on the basis of current prices while real GDP is calculated on the basis of the base price or constant prices to measure the real change.

In the question given above, we have two goods house and dog and the base year is given 2018. So the real gdp would be calculated with the prices of 2018 while nominal gdp with prices of 2019.

By observing the prices , it is clear that the prices have risen in 2019. So the nominal GDP would be greater than real gdp in 2019 since real gdp would have the prices of 2018.

(The above explanation was without calculation)

Now both real and nominal gdp would be calculated

Nominal GDP = prices of house in 2018* quantity of house in 2018+ price is dog walking in 2018* quantity of dog walking in 2018

= $200,000*1mn+ $25*1000 mn

=$ 225,000 mn

Nominal GDP in 2019 (with the same formula)

  Prices of house in 2019* number of houses in 2019+ prices of dog walking in 2019* number of dog walking in 2019

=$ 208,000*1.01 + 25.10*1010

=$ 210080+ $25351

=$ 235431mn

Real gdp in 2018 is same as nominal gdp in 2018 ie $ 225,000mn

Real gdp in 2019 = Prices of house in 2018* number of houses in 2019+ prices of dog walking in 2018* number of dog walking in 2019

= $ 200,000*1.01 +25*1010

= 202,000 + 25250

=$ 227,250 mn

(You can comment for doubts)