Question

5. Real versus nominal GDP Consider a simple economy that produces two goods: pencils and oranges. The following table shows the prices and quantities of the goods over a three-year period. Year Pencils Oranges Price Quantity Price Quantity (Dollars per pencil) (Number of pencils) (Dollars per orange) (Number of oranges)

Year	Pencils		Oranges
	Price	Quantity	Price	Quantity
	(Dollars per pencil)	(Number of pencils)	(Dollars per orange)	(Number of oranges)
2016	2	125	3	155
2017	4	135	3	210
2018	2	125	3	165

  

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

Year	Nominal GDP	Real GDP	GDP Deflator
	(Dollars)	(Base year 2016, dollars)
2016
2017
2018

From 2017 to 2018, nominal GDP decrease/increase , and real GDP decrease/increase .

The inflation rate in 2018 was -23.1% 0.2% 23.1% 76.9% 130%

s .

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

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.

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.

Answer 1

Year	Nominal GDP	Real GDP	GDP Deflator
	(Dollars)	(Base year 2016, dollars)
2016	2*125+3*155 = 715	2*125+3*155 = 715	100
2017	4*135+3*210 = 1170	2*135+3*210 = 900	130
2018	2*125+3*165 = 745	2*125+3*165 = 745	100

From 2017 to 2018, nominal GDP decrease and real GDP decrease

The inflation rate in 2018 was 100-130/130*100 = -23.1%

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.