Question

You are Given the Following Information for an OECS country for the years 2005 and 2004:

GDP Component (EC$MN)	2005	2004
Personal consumption	2949.9	2920.4
Government expenditure	1098.3	933.6
Investment	629.7	623.4
Exports of goods and services	2590.7	2538.8
Imports of goods and services	2305.2	2259.1

1. Calculate GDP for the years 2005 and 2004.You have just calculated nominal GDP.

2.You are told that inflation in 2005 was approximately 2%,what would be your initial estimate of real GDP growth in 2025?Briefly outline the difference between nominal and real GDP.

Answer 1

(a)

Calculate the nominal GDP for 2004 -

Nominal GDP = Personal consumption expenditure + Government expenditure + Investment + Exports of goods and services - Imports of goods and services

Nominal GDP = 2920.4 + 933.6 + 623.4 + 2538.8 - 2259.1

Nominal GDP = 4,757.1

The nominal GDP in 2004 was 4,757.1

Calculate the nominal GDP for 2005 -

Nominal GDP = Personal consumption expenditure + Government expenditure + Investment + Exports of goods and services - Imports of goods and services

Nominal GDP = 2949.9 + 1098.3 + 629.7 + 2590.7 - 2305.2

Nominal GDP = 4,963.4

The nominal GDP for 2005 was 4,963.4

(b)

Calculate the growth rate of nominal GDP between 2004 and 2005 -

Growth rate = [(Nominal GDP in 2005 - Nominal GDP in 2004)/Nominal GDP in 2004] * 100

Growth rate = [(4,963.4 - 4,757.1)/4,757.1] * 100

Growth rate = 4.34%

The growth rate of nominal GDP between 2004 and 2005 was 4.34%.

Inflation rate = 2%

Calculate the real GDP growth for 2005 -

Real GDP growth = Nominal GDP growth - Inflation rate

Real GDP growth = 4.34% - 2% = 2.34%

Thus,

The initial estimate of real GDP growth in 2005 was 2.43%.

The difference between nominal and real GDP is that nominal GDP is not adjusted for inflation but real GDP is adjusted for inflation.

Secondly, nominal GDP can increase if the price level in current year or production of final goods and services in current year or both happens. On the other hand, real GDP can only increase if production of final goods and services in current year increases.

So, real GDP indicates the actual growth in the economy and not the nominal GDP.