Question

If someone told you that the nominal gdp increased by 4% in 2004 explain why you would need two additional pieces of information to conclude that the standard of living for the typical person also increased by 4%.

Answer 1

The two additional pieces of information required to conclude that the standard of living increased by 4% for the typical person is REAL GDP for 2004 and the GDP deflator value for 2003. We are given nominal gdp at 4% increase which we can state as 1.04. If we are given real gdp or real gdp growth we can then derive the GDP deflator value for 2004 as follows: 2004 GDP deflator = Nominal GDP 2004/ Real GDP 2004. Now that we have the 2004 GDP deflator, we can compare this to the 2003 GDP deflator which is the second piece of info we need to calculate the Consumer Price Index or CPI. Calculated as follows: CPI = GDP deflator 2004 / GDP deflator 2003. The CPI value calculated above will give you year over year inflation from year end 2003 to year end 2004. We can then concluded the change in standard of living for the typical person which is simply the increase in Nominal GDP less inflation which is real GDP growth or SOL (Standard of living growth). Nominal GDP increase 2004 - Inflation = SOL increase. 4% - 2004 inflation = change in SOL.