Question

Suppose that a simple economy produces only four goods and services: shoes, DVDs, tomatoes, and catsup in 2010. Assume one half of the tomatoes are used in making the catsup and the other half of tomatoes are purchased by households.

Product	Quantity	Price ($)
Shoes	40	50
DVDs	100	25
Tomatoes	2000	1
Catsup	300	5

.What is the nominal GDP in 2010 for this simple economy?b.In 2011, suppose that the whole tomatoes products were used in making the catsup and atthe same time the price of shoes, DVDs, Tomatoes, Catsup increased three-fold each andtheir respective quantities also increased twice. Calculate Real GDP, GDP deflator and rat eof inflation in 2011?

Answer 1

(a) Nominal GDP in 2010 ($) = Sum of (Price in 2010 x Quantity in 2010)

= 50 x 40 + 25 x 100 + (1 x 2,000/2) + 5 x 300 = 2,000 + 2,500 + 1,000 + 1,500

= 7,000

(b) In 2011, No tomatoes were contributed to household consumption expenditure but were input to production, so their quantity will not be included in Nominal GDP. For rest all goods, quantities doubled and prices trebled.

Nominal GDP in 2011 ($) = (40 x 2 + 50 x 3) + (100 x 2 x 25 x 3) + (300 x 2 x 5 x 3) = 6,000 + 15,000 + 9,000

= 30,000

(c) Real GDP in 2011 ($) = Sum of (Price in 2010 x Quantity in 2011)

= (50 x 40 x 2) + (25 x 100 x 2) + (5 x 300 x 2) = 4,000 + 5,000 + 3,000 = 12,000

(d) GDP Deflator, 2011 = (Nominal GDP, 2011 / Real GDP, 2011) x 100 = ($30,000 / $12,000) x 100 = 250

(d) Rate of inflation = % Change in GDP Deflator = (250 / 100**) - 1 = 2.5 - 1 = 1.5 = 150%

**Base year (2010) value of GDP Deflator is always equal to 100.