Question

You are trying to explain to your friends the importance of using real GDP to measure economic health over time, but some of them still insist that nominal GDP is equally good. Use the data given below to show your friends the difference between real and nominal GDP. Nominal GDP (millions of dollars) = $14000. Price level (GDP deflator) = 88. What is real GDP given the nominal GDP and price level (GDP deflator)?

Answer 1

Answer: $15,909.09

Explanation:

Nominal GDP is the value of goods and services that is calculated on the basis of current year prices whereas Real GDP is the value of goods and services that is determined on the basis of Base year prices. If we are using the identical price for both the years for calculating GDP then we can see the increment in the current year GDP from the last year. This means that the quantity of goods produced in the current year is larger than the last year. That's why it is important to use Real GDP rather than Nominal GDP.

Given that,

Nominal GDP (millions of dollars) = $14000

Price level (GDP deflator) = 88

$\text{GDP dflator}=\frac{Nominal\ GDP}{Real\ GDP}\times100$

$\text{88}=\frac{14,000}{Real\ GDP}\times100$

Real GDP = 159.09 × 100

                = $15,909.09

Hence, Real GDP = $15,909.09.

Therefore, Real GDP is greater than Nominal GDP hence we can say that the amount of good produced is worth more than $14,000.