Question

In the year 2017, the economy produces 100 loaves of bread that sell for $2 each. In the year 2018, the econ- omy produces 200 loaves of bread that sell for $3 each. Calculate nominal GDP, real GDP, and the GDP defla- tor for each year. (Use 2017 as the base year.) By what percentage does each of these three statistics rise from one year to the next?

Answer 1

Explanation:

The computations are shown below:

For year 2017

Nominal GDP = Current year Price × Current year quantity

                       = $2 × 100

                        = $200

Real GDP = Base year Price × Current year quantity

                = $2 × 100

                = $200

GDP Deflator = (Nominal GDP ÷ Real GDP) × 100

                    = $200 ÷ $200 × 100

                    = 100

For year 2018

Nominal GDP = Current year Price × Current year quantity

                       = $3 × 200

                        = $600

Real GDP = Base year Price × Current year quantity

                = $2 × 200

                = $400

GDP Deflator = (Nominal GDP ÷ Real GDP) × 100

                    = $600 ÷ $400 × 100

                    = 150

Now the percentage of each one is as follows

For Nominal GDP

= $600 - $200 ÷ $200 × 100

= 200%

For real GDP

= $400 - $200 ÷ $200 × 100

= 100%

For GDP deflator is

= $150 - $100 ÷ $100 × $100

= 50%