Question

The following table shows prices and quantities in the hypothetical economy of Lowlands for two different items in two different years. Assume these are the only two items produced in this economy. Prices and Output in a Two-Item Economy Good Apples Shirts Year 1 Price Output $1.20 480 11.80 90 Year 2 Price Output $1.40 540 13.80 110 Instructions: Enter your answers as a whole number. a. What is the value of nominal GDP for Lowlands in year 1? b. What is the value of nominal GDP for Lowlands in year 2? C. Assume year 1 is used as the base year for this economy. What is the value of real GDP in year 2? d. In Lowlands, if nominal GDP were used instead of real GDP, the value of output in year 2 would be (Click to select) A.

Answer 1

a) Nominal GDP in year 1 = ($1.20 * 480) + (11.80 * 90) = 576 + 1062 = $1,638

b) Nominal GDP in year 2 = ($1.40 * 540) + (13.80 * 110) = 756 + 1518 = $2,274

c) Real GDP in year 2 = ($1.20 * 540) + (11.80 * 110) = 648 + 1298 = $1,946

d) Answer to the blank: Overstated