Question

Consider a simple economy that produces two goods: pens and muffins. The following table shows the prices and quantities of the goods over a three-year period.

Year	Pens		Muffins
	Price	Quantity	Price	Quantity
	(Dollars per pen)	(Number of pens)	(Dollars per muffin)	(Number of muffins)
2015	1	110	1	180
2016	2	140	4	210
2017	4	100	4	190

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

Year	Nominal GDP	Real GDP	GDP Deflator
	(Dollars)	(Base year 2015, dollars)
2015
2016
2017

From 2016 to 2017, nominal GDP decrease or increase , and real GDP decrease or increase

The inflation rate in 2017 was A- -25% B- 0.3%, C- 25%, D- 80%, E- 125%

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

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

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

C) Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and services an economy consumes.

Answer 1

Nominal GDP in 2015 = Quantity of pen in 2015 * Price of pen in 2015 + Quantity of muffin in 2015 * Price of muffin in 2015 = 110 * 1 + 180 * 1 = 290

Nominal GDP in 2016 = Quantity of pen in 2016 * Price of pen in 2016 + Quantity of muffin in 2016 * Price of muffin in 2016 = 140 * 2 + 210 * 4 = 1,120

Nominal GDP in 2017 = Quantity of pen in 2017 * Price of pen in 2017 + Quantity of muffin in 2017 * Price of muffin in 2017 = 100 * 4 + 190 * 4 = 1,160

Real GDP in 2015 = Nominal GDP in 2015 = 290

Real GDP in 2016 = Quantity of pen in 2016 * Price of pen in 2015 + Quantity of muffin in 2016 * Price of muffin in 2015 = 140 * 1 + 210 * 1 = 350

Real GDP in 2017 = Quantity of pen in 2017 * Price of pen in 2015 + Quantity of muffin in 2017 * Price of muffin in 2015 = 100 * 1 + 190 * 1 = 290

GDP deflator = Nominal GDP / Real GDP

From 2016 to 2017, nominal GDP increase and real GDP decrease. Inflation rate in 2017 = [(GDP deflator in 2017 - GDP deflator in 2016) / GDP deflator in 2016] * 100 = [(4 - 3.2) / 3.2] * 100 = 25%

Real GDP is a more accurate verion of GDP because it does not influenced by price changes while nominal GDP changes by current year price. Option B is correct.