Question

The following table gives national income data for Aspacifica.

GDP STATISTICS

            ______________________________________________________

                                             2010/11             2011/12             2012/13

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            Nominal GDP

            ($ billion)                     6,096                6,485                6,745

            Price index

            (2009/10 = 100) 112                   115                   118

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1. Calculate the percentage change in nominal GDP from 2010/11 to 2011/12, and from 2011/12 to 2012/13.
2. Calculate the inflation rate over these two periods.
3. Calculate real GDP in 2009/10 prices for the three years.
4. What are the growth rates of real GDP in 2011/12 and 2012/13?
5. Why are the growth rates in (d) lower than in (a)?

Answer 1

Answer. Nominal GDP is a measure that shows the value of goods and services in an economy using current prices while Real GDP assesses the value of goods using a constant price called the base year price as a measure and is adjusted for inflation or deflation.

It means that if the inflation is positive, real GDP will be lower than nominal GDP.

Real GDP is a good measure to check the long term economic performance.

a. percentage change in nominal GDP = change in gdp/gdp in previous year * 100

change in GDP of 2010/11 and 2011/12 is 6485 - 6096 = 389

So, percentage change in nominal gdp for year 2010/11 and 2011/12 is 389/6096 * 100 = 6.38%

Now, percentage change in nominal GDP for year 2011/12 and 2012/13 is change in gdp/previous year gdp * 100

change in gdp = 6745 - 6485 = 260

so, 260/6485 * 100= 4.0%

year	percentage change in nominal gdp
2010/11 - 2011/12	389/6096 * 100 = 6.38%
2011/12 - 2012/13	260/6485 * 100 = 4.0%

b. Inflation rate is measures the price change in the goods and services over the period of time. Inflation is a sudden rise in price of goods and services in an economy which decreases the purchasing power of an economy.

Inflation rate is calculated as = (current year price - last year price / last year price) * 100

so, from year 2010/11 - 2011/12 = (115-112 / 112)* 100 = 2.67%

2011/12 - 2012/13 = (118-115/115)*100 = 2.60%

c. Real GDP is calculated as nominal GDP/price index * 100

year	real gdp
2010/11	6096*100/112 = 5442.8
2011/12	6485*100/115 =5639.13
2012/13	6745*100/118 = 5716.1

d. Growth rate in real GDP = change in gdp/gdp in previous year * 100

change in GDP of 2010/11 and 2011/12 is 5639 - 5443 = 196

So, growth rate in real gdp for year 2010/11 and 2011/12 is 196/5443* 100 = 3.60%

Now, growth rate in real GDP for year 2011/12 and 2012/13 is change in gdp/previous year gdp * 100

change in gdp = 5716-5639= 77

growth rate = 77/ 5716 * 100 = 1.34%

year	growth rate in real gdp
2010/11 - 2011/12	3.60%
2011/12 - 2012/13	1.34%

e. Growth rate in nominal gdp is greater than growth rate in real gdp which means that there is inflation in an economy. if the real gdp increases it means that the demand for money exceeds the money supply.

to calculate real gdp we use base year price and current year quantites while in nominal gdp we multiply current year price by current year quantity.

thus, growth rate in real gdp is less than nominal gdp.