Question

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

Year	Pens		Erasers
	Price	Quantity	Price	Quantity
	(Dollars per pen)	(Number of pens)	(Dollars per eraser)	(Number of erasers)
2013	1	120	1	170
2014	2	170	4	230
2015	2	110	4	165

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

Year	Nominal GDP	Real GDP	GDP Deflator
	(Dollars)	(Base year 2013, dollars)
2013
2014
2015

From 2014 to 2015, nominal GDP , and real GDP .

The inflation rate in 2015 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 includes the value of exports, but nominal GDP does not.

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

Answer 1

Ans:

Calculation of Nominal GDP

2013 = (120 * $1) + (170 * $1)

   = $120 + $170

   = $290

2014 = (170 * $2) + (230 * $4)

   = $340 + $920

   = $1260

2015 = (110 * $2) + (165 * $4)

   = $220 + $660

   = $880

Calculation of real GDP

2013 = (120 * $1) + (170 * $1)

   = $120 + $170

   = $290

2014 = (170 * $1) + (230 * $1)

   = $170 + $230

   = $400

2015 = (110 * $1) + (165 * $1)

   = $110 + $165

   = $275

Table

Year	Nominal GDP	Real GDP	GDP deflator = (Nominal GDP / Real GDP) * 100
2013	$290	$290	($290 / $290) * 100 = 100
2014	$1260	$400	($1260 / $400) * 100=315
2015	$880	$275	($880 / $275) * 100 = 320

2) From 2014 to 2015, nominal GDP has increased , and real GD​P has decreased.

3) The inflation rate in 2015 as compared with base year = ((320 - 100) / 100) * 100

   = 220%

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

Real GDP is GDP after adjustment for price changes.hence Real GDP is not influenced by price changes, but nominal GDP is influenced by price changes.which means changes in prices will change the nominal GDP.