Homework Answers
Question 2.
A. Nominal gdp is the sum of all goods produced in an year multiplied by the year's prices/sum of value of all goods produced in an year at market prices.
Thus, Nominal gdp 2009= Quantity of tennis balls in 2009*Price of tennis balls in 2009+Quantity of tennis racquets in 2009*Price of tennis racquets in 2009+ Quantity of Gatorade in 2009*Price of Gatorade in 2009 = 200*2+30*40+400*1.5 = 400+1200+600=2200
Similarly, Nominal gdp 2010= 200*1.5+50*50+350*2=300+2500+700= 3500
Real GDP is the value of output at base year prices. Here, the base year is 2009, so we will use 2009 prices.
The real gdp of 2009 will be same as nominal gdp because it is the value of output at 2009 prices.
For real gdp 2010, we have,
REAL GDP 2010= Quantity of tennis balls in 2010*Price of tennis balls in 2009+ Quantity of tennis racquets in 2010*price of tennis racquets in 2009+ Quantity of Gatorade in 2010*price of Gatorade in 2009 = 200*2+50*40+350*1.5=400+2000+525=2925
B. We can observe from part a, that the nominal gdp of this economy has increased from 2009 to 2010. This increase in GDP is both due to increase in prices as well as output. Keeping the price constant, we have calculated the real gdp and it is clear that it has increased from 2200 to 2925. The increase is real gdp is due to increase in output. The other change from 2925 to 3500 is due to price increase or inflation.
Thus, nominal gdp includes both prices as well as output effect.
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