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
Year	(Dollars)	(Base year 2012, dollars)	GDP Deflator
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 1 year ago

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