Question

Suppose an economy produces only two goods, cups of coffee and gallons of milk as shown in Table below: TABLE Nominal versus real GDP YEAR COFFEE (CUPS) MILK (GALLONS) GDP (NOMINAL, REAL) 2010 (The Price $1.00 Quantity 10 Price $2.00 Quantity 20 base year) Expenditure Price $1.50 Quantity 10 Price $4.00 Quantity 20 2011 (Case 1) Expenditure Price $1.00 Quantity 15 Price $2.00 Quantity 40 2011 (Case 2) Expenditure Price $1.50 Quantity 15 Price $4.00 Quantity 40 2011 (Case 3) Expenditure a. Calculate the expenditure on each good and the nominal and real GDP for 2010, the base year. b. Repeat this exercise for each of the three alternative cases 1, 2, and 3. c. Explain the differences between the nominal GDP and real GDP in each of these cases.

Answer 1

The answers are provided in the images attached.

ANSWER D 2010(Base year) bast ♡ Nominal GDP/E Price current year x Qevurrent year = PEx Ot (Real GDP) Price year * fcurrent yeax =Po Xot 2010 (tzo) Eupenditure on cups of coffee IX 10 = $10 Expenditure on milka 2x20= $40 Nominal GD Do= Po x g.+ 1x10 +2x20=10+40 = $50 gallons of

Real Grabpfo =Po XQ 1x10 + 2x20 - 10640= $50 b) cou Cct=1) CASE I Expendthere on Gallod of Expenslibese en couple of coffee = 1.5 X10 = $15 Galloss of huilk - 4X20- $80 Nonnal GDP), - Pixg, -1-5X10+4x20=15+80= $95 = POX 91 = [X10 + 2x20= 10+40 = $50 (Real GDP), 2011 (t=2) CASE 2 Expenditure on Cups of coffee 1 X 15 = $15 Expenditure on gallows of milk = 2x40 = $80 Nomiral GDP)2 = PzxG2 = 1815+2x40-$95 (Real GDP)2 = Pox Q 2 = 1x15 +2x40-$95

2011 (t: 3) CASE 3 Expenditure on Cups of coffee = 1-5815 105X15= $22-5 Expenditure gallons of milk mulk 4x40= Nenival QDD) 2 = P3.883-1-5X15 thx40= 22-57160-$182-5 $160 Real GDP), - Po X8z = 1X15+2x40=15+80=$95 a coi c) Nominal GDP is the market value of all the final Goode country Real GDP refess for porse changes that may have been occurred due to inflation. t 2010 In base year, Wasuna bop falopp (Always) Becensé (Nominal GDP]o - Poxdo (Real bop) = Pox So, Nominal - Real -so-50=0 2011 CASE-I Nominal GDP = $95 Real GDP = $50 In this case price for both the goods have increased but the quantity is same as that 2010. Sherefore Nominal GOP has increased but Real GDP is the same of Nominal - Real = as so = 45

of 2 Sherefore as price CASE 2 =) The prices are same as that 2010, but quantity has same for both cases, Nomural = Real Nominal - PEx Qt Real But Pt=Po Nominal - Read = 95-95=0 Case 3 =) has She prices have increased and the also increased as compared to 2010. Pox ot the quantity As prices and quantities have increased Noninal GPP is very high as compared to Real GDP as the price in Real GDP is of year 2010. Nominal - Real = 182-5 - 95 -87-5