Question

In: Economics

4. Assume that the economy of Stockland produces four goods, rocks, socks, blocks, and clocks. Rocks...

4. Assume that the economy of Stockland produces four goods, rocks, socks, blocks, and clocks. Rocks and blocks are both used as weapons; they are good substitutes for each other. The quantities and prices for each of the goods in years one and two are given by the following table:

       YEAR 1                  YEAR 2
   good quantity price good quantity price
   rocks       200       $1   rocks   150   $4
   socks       200       $2   socks   220   $5
   blocks   200       $3   blocks   400   $2
   clocks   200       $4   clocks 300    $6

   a. What is nominal GDP in year 1?
   b. What is real GDP in year 1?
   c. What is nominal GDP in year 2?
   d. What is real GDP in year 2? (Use year 1 as the base year.)
   e. What is the percentage increase in nominal GDP? Real GDP?
   f. What is the GDP price deflator?

Expert Solution

A). Nominal GDP is the value of the goods and services at a market price.

Nominal GDP is the sum of the product of the market price and quantity of all the goods produced in a country.

Nominal GDP in Year 1 = P(Rocks)*Q(Rocks) + P(Socks)*Q(Socks) + P(Blocks)*Q(Blocks) + P(Clocks)*Q(Clocks)

Nominal GDP in Year 1 = 1 * 200 + 2 * 200 + 3 * 200 +4 * 200 =200+400+600+800 = 2000

Nominal GDP in Year 1 = $2,000

B). Real GDP is the value of the goods and services at a base or constant price.

Real GDP is the sum of the product of the base price and quantity of all the goods produced in a country.

Real GDP in Year 1 = P(Rocks)*Q(Rocks) + P(Socks)*Q(Socks) + P(Blocks)*Q(Blocks) + P(Clocks)*Q(Clocks)

Real GDP in Year 1 = 1 * 200 + 2 * 200 + 3 * 200 +4 * 200 =200+400+600+800 = 2000

Real GDP in Year 1 = $2,000

In the first year, both real and nominal GDP will be same.

C). We will the same formula to calculate Nominal GDP for Year 2,

Nominal GDP in Year 2 = P(Rocks)*Q(Rocks) + P(Socks)*Q(Socks) + P(Blocks)*Q(Blocks) + P(Clocks)*Q(Clocks)

Nominal GDP in Year 2 = 4 * 150 + 5 * 220 + 2 * 400 + 6 * 300 = 600 + 1100 + 800 + 1800 = 4300

Nominal GDP in Year 2 = $4,300

D). While calculating Real GDP for year 2, we will use quantity of year 2 and price of base year which is Year 1 here.

Real GDP in Year 2 = P(Rocks)*Q(Rocks) + P(Socks)*Q(Socks) + P(Blocks)*Q(Blocks) + P(Clocks)*Q(Clocks)

Real GDP in Year 2 = 1 * 150 + 2 * 220 + 3 * 400 + 4 * 300 = 150 + 440 + 1200 + 1200 = 2990

Real GDP in Year 2 = $2,990

E). To find the % increase in Nominal GDP and Real GDP we will use the below formula,

Nominal GDP % = {Nominal GDP ( Year 2) - Nominal GDP ( Year 1) } * 100 / Nominal GDP ( Year 1)

Nominal GDP % = (4300 - 2000) * 100 / 2000 = 2300 * 100 / 2000 = 115%

So, percentage increase in nominal GDP will be 115%.

Real GDP % = {Real GDP ( Year 2) - Real GDP( Year 1) } * 100 / Real GDP ( Year 1)

Real GDP % = (2990 - 2000) * 100 / 2000 = 49.5

Real GDP % = 49.5

So, percentage increase in real GDP will be 49.5%.

F). GDP Deflator = (Nominal GDP / Real GDP) * 100

GDP Deflator of Year 1 = (2000 / 2000) * 100 = 100

GDP Deflator of Year 1 = 100

GDP Deflator of Year 2 = (4,300 / 2,990) * 100 = 143.8

GDP Deflator of Year 2 = 143.8

Rahul Sunny answered 2 years ago

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