Question

Example 1: An economy produces two goods: hot dogs and burgers. In 2014, 15 hot dogs are produced at a price of $2 each, and 20 burgers at a price of $7 each. In 2015, 20 hot dogs are produced at a price of $4 each, and 30 burgers at a price of $8 each. Find the following: Nominal GDP of 2014: Nominal GDP of 2015: Real GDP of 2014 using 2014 as base year: Real GDP of 2015 using 2014 as base year: The GDP Deflator

Answer 1

The Nominal GDP of the economy that produces two goods in 2014 is $170.

The Nominal GDP of the economy that produces two goods in 2015 is $320.

The Real GDP in 2015 using 2014 as base year is $250.

The GDP deflator of an economy that produces two goods is 1.28.

Gross domestic product is the sum of goods and services that a country produces in a year.

Nominal GDP is GDP calculated using current year prices. Real GDP is GDP that is calculated using base year prices.

GDP deflator is the ratio of prices of goods and services produced using current year prices and prices of goods and services using base year prices.

Nominal GDP in 2014: (15 x $2) + (20 x $7) = $170.

Nominal GDP in 2015: (20 x $4) + (30 x $8) = $320

Real GDP in 2015: (20 x $2) + (30 x $7) = $250

GDP deflator = (nominal GDP / real GDP) x 100

($320 / $250) x 100 = 1.28

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