Question

Suppose that a simple economy produces only four goods and services: sweaters, CDs, sugar, and soft drinks. Assume one half of the sugar is used in making the soft drinks and the other half of the sugar is purchased by households.

Answer 1

Given that this is a simple economy, the simple GDP therefore will be given as: The sum total of all the products purchased in a given period by the households.

What is the calculation for Simple GDP?

The simple GDP of the economy described above is given as:

Product     Quantity  x  Prices ($) =  Revenue ($)

Sweaters  50             15            750

CDs            10             10            100

Sugar         200            0.9            180

Soft Drinks 400             0.75            300
Nominal GDP (Total Revenue)                1,330  

Hence the nominal GDP = $1,330

What is the GDP Deflator?

Recall that the price of key items on the list had increased by 50%, hence the deflator is:

The ratio of base year to current year =
805/1,330

= 1,652174

≈ 1.65.

What is Real GDP?

Real GDP is given as:

R = N/D

Where R = Real GDP

N = Nominal GDP

D = GDP Deflator


Hence,

R = 1,330/1.65

Real GDP = $806.060606061

≈ $806.06

Learn more about GDP at:
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