Question

5. Real versus nominal GDP

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

Year	Apples		Muffins
	Price	Quantity	Price	Quantity
	(Dollars per apple)	(Number of apples)	(Dollars per muffin)	(Number of muffins)
2012	1	110	2	185
2013	2	155	4	200
2014	3	110	4	165

Use the information from the preceding table to fill in the following table.

Year	Nominal GDP	Real GDP	GDP Deflator
	(Dollars)	(Base year 2012, dollars)
2012
2013
2014

From 2013 to 2014, nominal GDP   , and real GDP   .

The inflation rate in 2014 was   .

Why is real GDP a more accurate measure of an economy's production than nominal GDP?

Real GDP does not include the value of intermediate goods and services, but nominal GDP does.

Real GDP is not influenced by price changes, but nominal GDP is.

Real GDP includes the value of exports, but nominal GDP does not.

Answer 1

Solution:-

2012 :-

Nominal GDP = Current Year price * Current Quantity
= 1 * 110 + 2 * 185
= 110 + 370
= 480
Real GDP = Base Year Price * Current Year Quantity
= 1 * 110 + 2 * 185
= 110 + 370
= 480
GDP Deflator = Nominal GDP / Real GDP * 100
= 480 / 480 * 100
= 100

2013:-

Nominal GDP = Current Year price * Current Quantity
= 2 * 155 + 4 * 200
= 310 + 800
= 1,110
Real GDP = Base Year Price * Current Year Quantity
= 1 * 155 + 2 * 200
= 155 + 400
= 555
GDP Deflator = Nominal GDP / Real GDP * 100
= 1,110 / 555 * 100
= 200

2014:-

Nominal GDP = Current Year price * Current Quantity
= 3 * 110 + 4 * 165
= 330 + 660
= 990
Real GDP = Base Year Price * Current Year Quantity
= 1 * 110 + 2 * 165
= 110 + 330
= 440
GDP Deflator = Nominal GDP / Real GDP * 100
= 990 / 440 * 100
= 225

From 2013 to 2014, Nominal GDP Decrease and Real GDP Decrease.

The Inflation rate in 2014 was = 225 - 200 / 200 = 12.5

Answer is option (B).  

Real GDP is not influenced by price changes, but nominal GDP is