Question

In: Economics

Below are some data from the land of milk and honey Year Price of Milk Quantity...

Below are some data from the land of milk and honey

Year

Price of Milk

Quantity of Milk

Price of Honey

Quantity of Honey

2016

$1

100 quarts

$2

50 quarts

2017

1

200

2

100

2018

2

200

4

100
  1. Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2016 as the base year.
  2. Compute the percentage change in nominal GDP, real GDP and the GDP deflator in 2017 and 2018 from the preceding year. For each year, identify the variable (“price” or “quantity”) that does not change. Explain why your answer makes sense.
  3. Did economic well-being increase more in 2017 or 2018? Explain.

Solutions

Expert Solution

1.

Nominal GDP for 2016 = 1*100 + 2*50 = $200

Nominal GDP for 2017 = 1*200 + 2*100 = $400

Nominal GDP for 2018 = 2*200 + 4*100 = $800

Real GDP for 2016 = 1*100 + 2*50 = $200

Real GDP for 2017 = 1*200 + 2*100 = $400

Real GDP for 2018 = 1*200 + 2*100 = $400

GDP deflator for 2016 = (nominal GDP in 2016/real GDP in 2016)*100 = (200/200)*100

GDP deflator for 2016 = 100

GDP deflator for 2017 = (400/400)*100 = 400

GDP deflator for 2018 = (800/400)*100 = 200

2.

% change in nominal GDP in 2017 = (400-200)/200 = 100%

% change in nominal GDP in 2018 = (800-400)/400 = 100%

% change in real GDP in 2017 = (400-200)/200 = 100%

% change in real GDP in 2018 = (400-400)/400 = 0%

% change in GDP deflator in 2017 = (400-100)/100 = 300%

% change in GDP deflator in 2018 = (200-400)/400 = -50%

The price does not change, because in real value calculations, price is kept constant, though the output changes.

3.

Economic well being increased in 2017, because real GDP growth is 100%. Though, the real GDP growth was 0% in 2018. So, it is said that economic well being got better in 2017.

Rahul Sunny answered 1 year ago
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