Question

In: Economics

Year Cupcakes Envelopes Price Quantity Price Quantity (Dollars per cupcake) (Number of cupcakes) (Dollars per envelope)...

Year

Cupcakes

Envelopes

Price

Quantity

Price

Quantity

(Dollars per cupcake)

(Number of cupcakes)

(Dollars per envelope)

(Number of envelopes)
2012 2 115 5 175
2013 4 150 2 180
2014 1 100 2 160

Use the information from the preceding table to fill in the following table.

Year

Nominal GDP

Real GDP

GDP Deflator

(Dollars)

(Base year 2012, dollars)
2012
2013
2014

From 2013 to 2014, nominal GDPdecreased   , and real GDPdecreased   .

The inflation rate in 2014 was _______ .

Why is real GDP a more accurate measure of an economy's production than nominal GDP?

Real GDP is not influenced by price changes, but nominal GDP is.

Real GDP does not include the value of intermediate goods and services, but nominal GDP does.

Real GDP includes the value of exports, but nominal GDP does not.

Solutions

Expert Solution

Use the fact that nominal GDP = price of cupcake in current year x quantity of cupcake in current year + price of envelope in current year x quantity of envelope in current year

And real GDP = price of cupcake in base year x quantity of cupcake in current year + price of envelope in base year x quantity of envelope in current year

We find that, for example, nominal GDP 2013 = 4*150 + 2*180 = 960 while real GDP 2013 = 2*150 + 5*180 = 1200.

Hence deflator 2013 = nominal GDP 2013/Real GDP 2013 = 960/1200 = 80.

From 2013 to 2014, nominal GDP decreased   , and real GDP decreased   .

The inflation rate in 2014 (42 - 80)*100/80 = -47.50%

Real GDP is a more accurate measure because it is not influenced by price changes, but nominal GDP is.

Year Cupcakes quantity Price Envelope quantity Price Nominal GDP Real GDP (base 2012) GDP deflator = Nominal GDP/Real GDP
2012 2 115 5 175 1105 1105 100.00
2013 4 150 2 180 960 1200 80.00
2014 1 100 2 160 420 1000 42.00

Rahul Sunny answered 2 years ago
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