Question

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

Year	Pens		Oranges
	Price	Quantity	Price	Quantity
	(Dollars per pen)	(Number of pens)	(Dollars per orange)	(Number of oranges)
2017	1	120	2	190
2018	2	160	4	200
2019	3	130	4	195

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

Year	Nominal GDP	Real GDP	GDP Deflator
	(Dollars)	(Base year 2017, dollars)
2017
2018
2019

From 2018 to 2019, nominal GDP   , and real GDP   .

The inflation rate in 2019 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.

Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.

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

	Pens	Oranges
Year	Price	Quantity	Price	Quantity
2017	1	120	2	190
2018	2	160	4	200
2019	3	130	4	195

	Nominal GDP	Real GDP	GDP Deflator
Year
2017	500	500	100 ( 500 / 500 ) *100
2018	1120	560	200 ( 1120 / 560 ) *100
2019	1170	520	225

Nominal GDP for 2017 is ( 1 * 120 ) + ( 2 * 190 ) = 120 + 380 = 500

Prices of pens * quantity + prices of oranges * quantity of oranges

In the same way one can calculate for 2018 and 2019.

Now, in terms of Real GDP as 2017 is the base year, the prices of 2017 are considered for 2018 and 2019

Thus Real GDP for 2018 is ( 1 * 160 ) + ( 2 * 200 ) = 160 + 400 = 560

GDP Deflator is ( Nominal GDP / Real GDP ) * 100

	Nominal GDP	YoY growth	Real GDP	YoY growth
Year
2017	500		500
2018	1120	124%	560	12%
2019	1170	4% [ ( 1170 / 1120 ) - 1 ] *100	520	-7% [ ( 520 / 560 ) - 1 ] *100

	GDP Deflator
Year
2017	100
2018	200	100% [ ( 200 / 100 ) - 1 ] * 100
2019	225	13% [ ( 225 / 200 ) - 1 ] * 100

Thus inflation rate in 2019 was 13%.

Real GDP is a more accurate measure than nominal GDP because it is not influenced by price changes, whereas Nominal GDP is. First option is correct.

Nominal GDP adjusted for inflation is Real GDP, standalone Nominal GDP is not adjusted, it is based on market value of goods and services. Both Nominal and Real GDP measure the value of goods and services produced in an economy.