Question

4. Real Versus Nominal GDP Aa Aa Consider a simple economy that produces two goods: cupcakes and muffins. The following table shows the prices and quantities for the goods over a three-year period. Prices and Quantities Price of Quantity of Price of cupcakes (6) cupcakes muffins (C) 150 2 2003 200 Quantity of muffins Year 2016 2017 2018 100 150 100 Use the information from the previous table to fill in the following table. Real GDP (Base year 2016) (C) GDP Deflator Year Nominal GDP (€) 2016 2017 2018 From 2017 to 2018, nominal GDP and real GDP The inflation rate in 2018 was Why is real GDP a more accurate measure of an economy's production than nominal GDP? O Real GDP is not influenced by price changes, but nominal GDP is. O 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. O Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.

Answer 1

Year Nominal GDP 0 0 YOU WN- 2016 2017 2018 Cupcakes Price Quantity 150 200 200 Muffins Price Quantity 100 150 100 350 850 1000 Real GDP GDP (Base Year 2016) | Deflator 350 100 500 170 400 250

Year 2016 2017 2018 Cupcakes Price Quantity 150 200 200 Muffins Nominal GDP Real GDP GDP Price Quantity (Base Year 2016) Deflator 100 (C5*D5)+(E5*F5) ($C$5*D5)+($E$5*F5) (65/H5)*100 150 (C6*D6)+E6*F6) ($C$5*D6)+($E$5*F6) (G6/H6)*100 100 (C7*D7)+(E7*F7) ($C$5*D7)+($E$5*F7) (G7/17)*100]

So as per the calculations shown above,

From 2017 to 2018, nominal GDP increased (from 850 to 1000) and Real GDP decreased (from 500 to 400).

Inflation Rate in 2018:

= { (GDP Deflator in 2018 - GDP Deflator in 2017) / (GDP Deflator in 2017)} * 100

= { (250- 170) / (170)} * 100

= { (70/170) * 100 }

= 41.18%

Real GDP is a more accurate measure of an economy's production as real GDP takes into account the price changes whereas Nominal GDP does not.