Question

The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data 

Instructions: Enter your responses in the gray-shaded cells. Round your answers to 2 decimal places. 

Nominal GDP Year 1968 1978 1988 1998 2008 Price Index 2005 100 22.01 40.40 66.98 85.51 108.48 Real GDP, Billions Effect on Nominal GDP Billions $909.80 2293.80 5100.40 8793.50 14441.40 0.00 increase / inflating increase / inflating increase / inflating increase / inflating decrease / deflating 0.00

Answer 1

Solution:

Inflating something (deflating) means increasing (decreasing/shrinking) the value of something. The required formula is as follows:

Real GDP = (Nominal GDP/price index)*100

So, when the price index is below 100, it means that there is deflation in economy. Thus, the value of nominal GDP decreases, meaning we are deflating the nominal GDP. Similarly, as price level rises, or inflation is caused (price index reaching above 100, as 100 is the base year price). So, in this case it means that we are inflating the nominal GDP.

Thus, noticing the price index column, it can be easily said that for top four rows (years 1968, 1978, 1988, 1998), the nominal GDP is inflating, while for the last one it is deflating.

Completing the table by filling in for real GDP:

Year	Nominal GDP	Price index	Real GDP, Billions
1968	909.80	22.01	(909.80/22.01)*100 = $4,133.58
1978	2293.80	40.40	(2293.80/40.40)*100 = $5,677.72
1988	5100.40	66.98	(5100.40/66.98)*100 = $7,614.81
1998	8793.50	85.51	(8793.50/85.51)*100 = $10,283.60
2008	14441.40	108.48	(14441.40/108.48)*100 = $13,312.50