Question

Assume that an economy produces three goods, mugs, jugs, and hugs. Hugs (of the Hershey variety) are their food source. Mugs and jugs are used for carrying water; they are good substitutes for each other. The quantities and prices for each of the goods in years one and two are given by the following table:

YEAR 1 YEAR 2

good quantity price good quantity price

hugs 200 $2 hugs 400 $3

mugs 200 $3 mugs 100 $8

jugs 200 $4 jugs 400 $3

a. What is nominal GDP in year 1?

b. What is real GDP in year 1? (Use year 1 as the base year.)

c. What is nominal GDP in year 2?

d. What is real GDP in year 2?

e. What is the percentage increase in nominal GDP? Real G

Answer 1

(a)

Year 1	Year 2
Good	Quantity	Price	Good	Quantity	Price
hugs	200	$2	hugs	400	$3
mugs	200	$3	mugs	100	$8
jugs	200	$4	jugs	400	$3

Nominal GDP = Current Year Quantity * Current Year price.

Nominal GDP in year 1 =Year 1 quantity * year 1 price.

Nominal GDP in year 1 = (200 * $2) + (200 *$3) + (200 * $4)

Nominal GDP in year 1 = $1800

(b) Real GDP = Current year quantity * Base year Price.

Year 1 is a base year

Real GDP in year 1 =Year 1 quantity * year 1 price.

Real GDP in year 1 = (200 * $2) + (200 *$3) + (200 * $4)

Real GDP in year 1 = $1800

(c)

Nominal GDP in year 2 =Year 2 quantity * year 2 price.

Nominal GDP in year 2 = (400 * $3) + (100 *$8) + (400 * $3)

Nominal GDP in year 2 = $3200

(d) Real GDP in year 2 = Year 2 quantity * year 1 price

Real GDP in year 2 = (400 * $2) + (100 *$3) + (400 * $4)

Real GDP in year 2 = $2700

(e) % increase in nominal GDP = [(Year 2 nominal GDP - Year 1 nominal GDP) / Year 1 nominal GDP]*100

% increase in nominal GDP = [($3200 - $1800) / $1800] *100

% increase in nominal GDP = 77.78

There is 77.78% increase in nominal GDP

% increase in real GDP = [(Year 2 real GDP - Year 1 real GDP) / Year 1 real GDP]*100

% increase in real GDP = [($2700 - $1800) / $1800] *100

% increase in real GDP = 50

There is 50% increase in real GDP