Question

Macro Economics

Table contains some data about the economy of Potsteel. Assume that this is a complete record of the economy. Some parts of this question ask for numerical solutions. You must include both the final answer, and how you found that answer

Year	Quantity of Potatoes Produced	Price of Potatoes	Quantity of Steel Produced	Quantity of Steel Exported	Price of Steel	Unemployment Benefit
2016	100	1	200	100	2	200
2017	110	1.1	210	80	2.1	160
2018	90	1.1	180	60	1.8	300
2019	140	1.2	250	40	2	220

Using the data in Table 1, find the growth rate in real GDP each year from 2017 to 2019 taking (i) 2016 as the base year, and (ii) 2019 as the base year. (iii) Explain why there is a difference in your answers to parts (i) and (ii).

Answer 1

Solution

GDP is the total value of goods / services produced in an economy.

Real GDP = Nominal GDP - Inflation

(i) GDP in 2016 : (100 *1) + (200 *2) i.e., 500

Since 2016 is considered as the base year,the real GDP is same as nominal GDP for the year 2016

Nominal GDP in 2017 : (110 *1.1) + (210 *2.1) i.e.,562

But we can see that there is an inflation in the price of the potatoes and steel by 10% each

So,by eliminating the  10% inflation , the real GDP for 2017 becomes 530

So,the increase in the real GDP for 2017 is : (30 / 500 ) * 100 i.e., 6%

2018

Real GDP = (90 * 1) + (180 *2) i.e., 450

Real GDP growth rate = (-50 / 500) * 100 i.e., -10%

2019

Real GDP = (140 *1) + (250 * 2 ) i.e.,640

Real GDP growth rate = (-50 / 500) * 100 i.e., -10% = (140 / 500) * 100 i.e., 28%

(ii)

Taking 2019 as the base year,GDP (Both Nominal & Real) in 2019 is : (140 *1.20) + (250 * 2) = (168+500) i.e., 668

Real GDP for 2018 = (90 * 1.2) + (180 * 2) i.e., 468

Real GDP growth rate in 2018 = (-200 / 668) * 100 => - 29.94%

Real GDP for 2017 = (110 * 1.2) + (210 * 2) i.e., 552

Real GDP growth rate in 2017= (-116 / 668) * 100 => -17.36%

Real GDP for 2016 = (100 * 1.2) + (200 * 2) i.e., 520

Real GDP growth rate in 2016 = (-148 / 668) * 100 => -22.15%

(ii)By taking the year 2019 as the base year the real GDP growth rates of all the remaining years turned negative because of the fact that the Quantity of potatoes and steel produced are the highest in the year 2019 when compared to all the remaining years

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