Question

1. Consider the following data on Canadian GDP”

Year	Nominal GDP (billions)	GDP Deflator (base year: 2002)
2009	$1600	118
2008	$1520	121

1. What was the growth rate of nominal GDP between 2008 and 2009? (The growth rate is the percentage change from one period to the next).

2. What was the growth rate of the GDP deflator between 2008 and 2009?

3. What was real GDP in 2008 measured in 2002 prices?

4. What was real GDP in 2009 measured in 2002 prices?

5. What was the growth rate of real GDP between 2008 and 2009?

6. Was the growth rate of nominal GDP higher or lower than the growth rate of real GDP? Explain

Answer 1

1. The growth rate of nominal GDP between 2008 and 2009 = {(Nominal GDP of 2009 – Nominal GDP of 2008)/ Nominal GDP of 2008} x 100

= {(1600 – 1520)/ 1520} x 100 = 5.2631 or Approx 5.26% (Increase)

The growth rate of nominal GDP between 2008 and 2009 is increased by 5.26%

2. The growth rate of GDP deflator between 2008 and 2009 = {(GDP deflator of 2009 – GDP deflator of 2008)/ GDP deflator of 2008} x 100

= {(118 – 121)/ 118} x 100 = -2.5423 or Approx -2.54%   (decrease)

The growth rate of GDP deflator between 2008 and 2009 is decreased by 2.54%

3. Real GDP in 2008 measured in 2002 price

As 2002 is base year so the GDP deflator of 2008 = 100

Real GDP in 2008 = (Nominal GDP of 2008 / GDP deflator of 2008) x GDP deflator of 2002

Real GDP in 2008 = (1520 / 121) x 100 = 1256.198 or Approx $1256.20 billion

Real GDP in 2008 measured in 2002 price is $1256.20 billion

4. Real GDP in 2009 measured in 2002 price

As 2002 is base year so the GDP deflator of 2008 = 100

Real GDP in 2009 = (Nominal GDP of 2009 / GDP deflator of 2009) x GDP deflator of 2002

Real GDP in 2009 = (1600 / 118) x 100 = 1355.9322 or Approx $1355.93 billion

Real GDP in 2009 measured in 2002 price is $1355.93 billion

5. The growth rate of real GDP between 2008 and 2009 = {(Real GDP of 2009 – Real GDP of 2008)/ Real GDP of 2008} x 100

= {(1355.93 – 1256.20)/ 1256.20} x 100 = 7.939 or Approx 7.94% (Increase)

The growth rate of real GDP between 2008 and 2009 is increased by 7.94%

6. The growth rate of nominal GDP between 2008 and 2009 is increased by 5.26%

The growth rate of real GDP between 2008 and 2009 is increased by 7.94%

In between 2008 and 2009, both the Nominal GDP and Real GDP increased, but the growth of Nominal GDP is lower than the Growth of Real GDP

Real GDP is obtained when nominal GDP adjusted with inflation and growth of Real GDP reflects the growth in real production in the economy.

In between 2008 and 2009, the increase in the rate of price or inflation is less than the increase in the real production in Canadian economy. Therefore the growth of Growth of Real GDP is more than Nominal GDP.