Question

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

Year	Apples		Erasers
	Price	Quantity	Price	Quantity
	(Dollars per apple)	(Number of apples)	(Dollars per eraser)	(Number of erasers)
2012	1	110	2	150
2013	2	155	4	215
2014	3	120	4	180

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 GDP   , and real GDP   .

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 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.

Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.

Answer 1

Nominal GDP = sum of price of good in current year * quantity of good in current year

Real GDP = sum of price of goods in base year * quantity of goods in current year

GDP Deflator= Nominal GDP/Real GDP * 100

Inflation = (GDP Deflator of current year - GDP Deflator of previous year) / GDP Deflator of previous year * 100

For year 2012 (base year is 2012)

Nominal GDP = 1*110+2*150 = 410

Real GDP = 1*110+2*150= 410

GDP Deflator = 410/410 * 100 = 100

For year 2013 (base year is 2012)

Nominal GDP = 2*155+4*215 = 1170

Real GDP = 1*155+2*215= 585

GDP Deflator = 1170/585 * 100 = 200

For year 2014 (base year is 2012)

Nominal GDP = 3*120+4*180 = 1080

Real GDP = 1*120+2*180= 480

GDP Deflator = 1080/480 * 100 = 225

Inflation in 2014 = (GDP Deflator of 2014 - GDP Deflator of 2013) / GDP Deflator of 2013 * 100

=(225-200)/200 * 100

= 12.5%

From 2013 to 2014 nominal GDP decreased and Real GDP decreased

Correct answer for last question is Real GDP is not influenced by price changes, but nominal GDP is.