Question

The annual output and prices of a 3-good economy are shown in the table below. Assume Year 1 is the base year. Quantity Price of Ice Quantity of of Ice Cream Shampoo Cream Price of Shampoo Quantity of Peanut Butter Price of Peanut Butter Year 1 $3 Year 2 $10 What was nominal GDP in year 1?$ What was real GDP in year 1?$ What was nominal GDP in year 2?$ 0 What was real GDP in year 2?$O

Answer 1

Answer

Nominal GDP is market value of all goods and services produced measured at current prices.

Nominal GDP = Sum of (price*quantity) of all goods where prices used are of current year and quantity used are also of current year.

Real GDP is market value of all goods and services produced measured at constant prices(Base year prices).

Nominal GDP = Sum of (price*quantity) of all goods where prices used are of base year and quantity used are of current year.

Here Base year is year 1.

a) Nominal GDP in year 1 = 6*4 + 5*2 + 3*4 = 46

b) Real GDP in year 1 = 6*4 + 5*2 + 3*4 = 46(Note Real GDP = Nominal GDP because Year 1 is a base year and current prices are same as constant prices)

c) Nominal GDP in year 2 = 10*6 + 9*3 + 5*3 = 102 (Prices and quantity used are both of year 2)

d) Real GDP in Year 2 = 6*6 + 5*3 + 3*3 = 60 (Prices used are of base year i.e. year 1 and quantity used are of year 2)