Question

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

Year	Pencils		Muffins
	Price	Quantity	Price	Quantity
	(Dollars per pencil)	(Number of pencils)	(Dollars per muffin)	(Number of muffins)
2018	1	120	1	195
2019	2	130	4	195
2020	4	130	4	145

From 2019 to 2020, nominal GDP   , and real GDP   .

The inflation rate in 2020 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 does not include the value of intermediate goods and services, but nominal GDP does.

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.

Answer 1

GDP (Gross Domestic Product): It refers to the total market value of all produced final goods and services during a specific period.

Real GDP: It refers to the measurement of the total value of all goods and services produced measured at base year price during a specific period. It considers inflation while measuring GDP and generally lower than nominal GDP

Nominal GDP: It refers to the measurement of the total value of all goods and services produced measured at the current year price during a specific period. It ignores inflation while making calculations of GDP and generally higher than Real GDP.

Assuming 2018 as the base year.

Year	Muffins		Pencils		Nominal GDP	Real GDP
	Price	Quantity	Price	Quantity	(In Dollars)	BASE YEAR – 2018 Base year price $1 for both pencil and muffin (In Dollars)
	(Dollars per muffin)	(Number of muffins)	(Dollars per pencil)	(Number of pencils)
2018	1	195	1	120	195+120=315	120+195=315
2019	4	195	2	130	780+260=1040	130+195=325
2020	4	145	4	130	580+520=1100	130+145=275

The inflation rate in 2020 is calculated as follows:

Real GDP is a more accurate measure of an economy's performance than nominal GDP because real GDP is not influenced by price changes, but nominal GDP is.