In: Economics
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?
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