Question

5. Real versus nominal GDP Consider a simple economy that produces two goods: pens and envelopes. The following table shows the prices and quantities of the goods over a three-year period Pens Price Quantity (Dollars per pen) (Number of pens) 1 110 Envelopes Price Quantity (Dollars per envelope) (Number of envelopes) 180 Year 2015 4 2015 140 210 2 2017 4 100 190 4 Use the information from the preceding table to fill in the following table. Nominal GDP (Dollars) Real GDP (Base year 2015, dollars) GDP Dellator Year 2015 2016 2017 From 2016 to 2017, nominal GDP and real GDP The inflation rate in 2017 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 includes the value of exports, but nominal GDP does not Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.

Answer 1

Required:

Year	Nominal GDP	Real GDP	GDP Deflator
2015	$290 [($1*110) + ($1*180)]	$290 [($1*110) + ($1*180)]	100 (290 / 290) * 100
2016	$1,120 [($2*140) + ($4*210)]	$350 [($1*140) + ($1*210)]	320 (1,120 / 350) * 100
2017	$1,160 [($4*100) + ($4*190)]	$290 [($1*100) + ($1*190)]	400 (1,160 / 290) * 100

• From 2016 to 2017, Nominal GDP Increases, and Real GDP Decreases.
• Inflation rate = (GDP Deflator 2017 - GDP Deflator 2016 / GDP Deflator 2016) * 100

= (400 - 320 / 320) * 100

= 25%

• Real GDP is not influenced by price changes, but nominal GDP is.