Question

Cuestions 1 and 2 Consider the followine data containing the quantities produced of final goods an respective prices for Orangeland. Using the data below, fill up all the empty cells Use 2 decimals in your calculations. inal goods and the Quantity of oranges Quantity of computers 2018 100 2019 %Chg. 110 10.00 400 40 Price of oranges Price of computers 10 100 12 90 20 -10 Nominal GDP Constant-price GDP in 2018 prices Deflator (based on 2018 prices) Based on your calculations, answer the questions below. Question 1. Which of the statements below is correct? a) Both nominal and real GDP have risen. b) Both nominal and real GDP have fallen. C) At current prices GDP has risen but at constant prices GDP has fallen. d) At current prices GDP has fallen but al.constant prices GDP has risen. Question 2. Which statement below is correct? a) The economy has experienced inflation. The price level has increased by about 5.5%. b) The economy has experienced inflation. The price level has increased by exactly 2%. c) The economy has experienced deflation. The price level has fallen by less than 2%. d) The economy has experienced deflation. The price level has fallen by more than 3%

Answer 1

Solution:

Nominal GDP is calculated as prices in an year*production in that year. So, nominal GDP here = price per orange*quantity of oranges produced + price per computer*quantity of computers produced (for each individual year)

Constant price GDP (or real GDP) is calculated at base year (here 2018) prices. That is, production value at base year prices gives real GDP. In this sense, real GDP and nominal GDP for base year is exactly equal.

Deflator = (Nominal value/real value)*100, so GDP deflator = (nominal GDP/real GDP)*100

Finally, percentage change = (final value - initial value)*100/initial value

Then, we can fill the table as follows:

	2018	2019	% change
Quantity of oranges	100	110	10.00
Quantity of computers	40	40	0.00
Price of oranges	10	12	20.00
Price of computers	100	90	-10.00
Nominal GDP	10*100 + 100*40 = $5,000	12*110 + 90*40 = $4,920	(4920 - 5000)*100/5000 = -1.60
Constant price GDP (2018 prices)	10*100 + 100*40 = $5,000	10*110 + 100*40 = $5,100	(5100 - 5000)*100/5000 = 2.00
Deflator (based on 2018 prices)	(5000/5000)*100 = 100	(4920/5100)*100 = 96.47	(96.47 - 100)*100/100 = -3.53

1. From the above table, we can see that the percentage change for nominal GDP is negative while the percentage change change for real/fixed price GDP is positive. This indicates that the nominal GDP has declined while the real GDP has increased from 2018 to 2019. So, correct option is (d).

2. Inflation is measured as percentage change in GDP deflator. From the above table, we can find the percentage change in GDP deflator as -3.53; this negative sign is an indication of negative inflation or that the price level has fallen in general from year 2018 to 2019.

Thus, the economy experiences deflation, which amounts to 3.53% approximately (which is more than 3%). Thus, the correct option again is (d).