Question

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

Year	Pencils		Envelopes
	Price	Quantity	Price	Quantity
	(Dollars per pencil)	(Number of pencils)	(Dollars per envelope)	(Number of envelopes)
2016	1	110	2	150
2017	2	155	4	215
2018	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 2016, dollars)
2016
2017
2018

From 2017 to 2018, nominal GDP   , and real GDP   .

The inflation rate in 2018 was   .

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

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.

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

Answer 1

From the given information calculate the real and nominal GDP.

Calculation of Nominal GDP

Nominal GDP = Current year Quantity * Price of Current year

	Pencil	Envelop	Nominal GDP
Price	Quantity	Cost	Price	Quantity	Cost
2016	1	110	110	2	150	300	110+300=410
2017	2	155	310	4	215	860	310+860=1,170
2018	3	120	360	4	180	720	360+720 = 1,080

Calculation of Real GDP

Real GDP = Current year Quantity * Price of BASE year

In the given question, BASE year is 2016

	Milk	Honey	Nominal GDP
Price	Quantity	Cost	Price	Quantity	Cost
2016	1	110	110	2	150	300	110+300 = 410
2017	1	155	155	2	215	430	155+430 = 585
2018	1	120	120	2	180	360	120+360 = 480

Now calculate the GDP Deflator for each year

GDP Deflator Formula is (Nominal GDP ÷ Real GDP) * 100

Year	Nominal GDP	Real GDP	GDP Deflator
2016	410	410	(410/410) * 100 = 100
2017	1,170	585	(1,170/585) * 100 = 200
2018	1,080	480	(1,080/480) * 100 = 225

From 2017 to 2018, nominal GDP decreased, and real GDP decreased.

Inflation in 2018

Rate of inflation = {(225 – 200) / 200} * 100

Rate of inflation = 12.5%

The inflation rate in 2018 was  

The 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 influenced by price changes.