Question

1. Assume that nominal GDP for 2012 was $700B with a price index of 110 (using 2004 as the base year). What is the real GDP for 2012?
Remember: To compute the real GDP for any given year use this formula: Real GDP = Nominal GDP/Price Index x 100
2. Assume that nominal GDP for 2013 was $850B with a price index of 140 (using 2004 as the base year). What is the Real GDP for 2013?
Remember the formula: Real GDP = Nominal GDP/Price Index x 100
3. Did real GDP increase or decrease from 2012 to 2013? If it decreased, explain why. If it increased explain why. Compare your answers from question (1) and (2) above and answer question (3).
4. What are some reasons why Real GDP could decrease or increase in this example, and how a similar situation could impact the future economic growth or decline of the U.S. economy?

Answer 1

1. The real GDP is calculated using
Real GDP = Nominal GDP/Price Index x 100
= $700 B / 140  x 100
= $500 B

2. Using the same formula
Real GDP = $850 B / 140  x 100
= $607 B

3. The real GDP increased because the price index and nominal GDP increased.

4. Real GDP will decrease when the price index would go down.