Question

Consider the following data that gives the quantity produced and unit price for three different goods across two different years. Assume that the base year is 2019. Good 2019 Price 2019 Quantity 2020 Price 2020 Quantity A $2.00 500 $2.50 600 B $4.00 1,000 $5.50 950 C $2.00 220 $1.30 350 (a) Calculate the market value of good C in 2019. (b) Calculate the nominal GDP in 2020 and real GDP in 2020. (c) Suppose from 2020 to 2021, nominal GDP decreases. Can we conclude that the country is poorer? Explain.

Answer 1

YEAR P_A Q_A P_B Q_B P_C Q_C

_{2020 $2.50 600 $5.50 950 $1.30 350}

_{2019 $2 500 $4 1000 $2 220}

Nominal GDP in 2020= nominal GDP is simply the sum of  current year price* current year quantity of all goods available.

(2.50*600)+(5.50*950)+(1.30*350)

=1500+5225+455

=$7180.

Real GDP of 2020= sum of base year price* current year quantity.

(2*600)+(4*950)+(2*350)

=1200+3800+700

=$5700.

Nominal value of good C in 2019= 2*220= 440

c) If from 2020 to 2021 if nominal GDP decreases then,

Generally if GDP is rising, the economy is in good shape and the country is progressing. Nominal GDP is an assessment of economic production in an economy that includes current price in its calculation. It doesn't take inflation into consideration.. GDP alone doesn't determine the country to be richer or poor. So only decreasing GDP isn't good enough to comment whether the country is poor. We need to know various other factors as well. Even a country with increasing GDP might have a huge gap between the rich and the poor in that country. The maximum share of income is hold by a few rich and the remaining income is divided among the remaining population. Thus, it is wrong to conclude that decreasing nominal GDP means the economy is poorer.