Question

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

Year	Pencils		Muffins
	Price	Quantity	Price	Quantity
	(Dollars per pencil)	(Number of pencils)	(Dollars per muffin)	(Number of muffins)
2012	2	115	5	175
2013	4	150	2	180
2014	1	100	2	160

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

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

From 2013 to 2014, nominal GDP (decreased/increased) , and real GDP (decreased/increased) .

The inflation rate in 2014 was (-47.5%, -0.5%, 47.5%, 52.5%, 190.5%)

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

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

2)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.

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

Answer 1

Ans:

Year	Nominal GDP ( Dollars)	Real GDP (base year 2012, dollars)	GDP Deflaor
2012	1105	1105	100
2013	960	1200	80
2014	420	1000	42

Explanation:

Nominal GDP = sum of the current year price * current year quantity of all goods

Nominal GDP for the year 2012 = ( 2* 115 ) + ( 5 * 175 ) = 230 + 875 = $1105

Nominal GDP for the year 2013 = ( 4* 150  ) + ( 2 * 180 ) = 600 + 360 =$960

Nominal GDP for the year 2014  = ( 1* 100 ) + ( 2 * 160) = 100 + 320 = $ 420

Real GDP = sum of the base year price * current year quantity of all goods

Real GDP for the year 2012 = ( 2* 115 ) + ( 5 * 175 ) = 230 + 875 = $1105

Real GDP for the year 2013 = ( 2* 150 ) + ( 5 * 180 ) = 300 + 900 = $1200

Real GDP for the year 2014 = ( 2* 100 ) + ( 5 * 160 ) = 200 + 800 = $1000

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

2012 =  100

2013 = ( 960 / 1200 ) *100 = 80

2014 = ( 420 / 1000 ) *100 = 42

Ans:  From 2013 to 2014, nominal GDP decreased , and real GDP decreased.

Ans: The inflation rate in 2014 was -47.5%

Explanation:

Inflation rate in 2014 = ( current year GDP deflator - previous year GDP deflator ) / previous year GDP deflator} *100

= {( 42 -80 ) / 80 } *100

= ( - 38 / 80 )*100

= - 0.475 *100 = - 47.5%

Ans: 3) Real GDP is not influenced by price changes, but nominal GDP is.

Explanation:

The real GDP is a more accurate measure of an economy's production than nominal GDP because it is not influenced by price changes whereas  nominal GDP is influenced by price changes.