Question

Year	# Cool Ranch	Price of Cool Ranch	# Nacho Cheesier	Price of Nacho Cheesier
2005	10	$5	20	$5
2006	15	$4	20	$6

Suppose the nation of El Dorito produces only two products, Cool Ranch and Nacho Cheesier. The prices and quantities are shown for two years above.

What was nominal GDP in 2005? It was   .

What was nominal GDP in 2006? It was   .

Now determine what Real GDP was in 2005 using 2006 dollars. It was   .

Just for fun, figure out what Real GDP was in 2006 using 2005 as the base year.   .

Now if we use 2005 for the base year again, what is the GDP deflator for 2006?   Use at

Answer 1

	2005			2006
	Quantity	Price	Cost	Quantity	Price	Cost
Cool Ranch	10	5	50	15	4	60
Nacho Cheesier	20	5	100	20	6	120
Nominal GDP			150			180

Nominal GDP = Quantity of current year*Price of current yeae

What was nominal GDP in 2005? It was 150.

What was nominal GDP in 2006? It was 180.

Real GDP was in 2005 using 2006 dollars.

	2005
	Quantity	Price	Cost
Cool Ranch	10	4	40
Nacho Cheesier	20	6	120
Real GDP			160

Now determine what Real GDP was in 2005 using 2006 dollars. It was 160.

Real GDP = Quantities of current year*Price of Base year

Real GDP was in 2006 using 2005 as the base year.

	2006
	Quantity	Price	Cost
Cool Ranch	15	5	75
Nacho Cheesier	20	5	100
			175

Real GDP was in 2006 using 2005 as the base year. It was 175.

What is the GDP deflator for 2006 using use 2005 for the base year?

Nominal GDP in 2006 =180

Real GDP in 2006 = 175

GDP deflator = Nominal GDP/Real GDP*100

GDP deflator = 180/175*100

GDP deflator = 102.85%