Chapter 10 Question 5 Real versus nominal GDP Solution
Consider a simple economy that produces two goods: pens and envelopes. The following table
... [Show More] shows
the prices and quantities for the goods over a three-year period.
Year
Pens Envelopes
Price Quantity Price Quantity
(Dollars per
pen)
(Number of
pens)
(Dollars per
envelope)
(Number of
envelopes)
2009 1 120 2 190
2010 2 160 4 200
2011 3 130 4 195
Use the information from the previous table to fill in the following table.
Year
Nominal GDP Real GDP
(Dollars) (Base year 2009, Dollars) GDP Deflator
2009
500 500 100
2010
1,120 560 200
2011
1,170 520 225
Points:
1 / 1
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Explanation:
Nominal GDP measures the value of current output using current prices:
Year Calculating Nominal GDP
2009
2010
2011
Real GDP measures the value of output in the current year using prices from a base year, in this case
2009:
Year Calculating Real GDP (Base Year 2009)
2009
2010
2011
The GDP deflator is a measure of the price level calculated by dividing nominal GDP by real GDP and
multiplying by 100:
Year Calculating the GDP Deflator
2009
2010
2011
From 2010 to 2011, nominal GDP increased , and real GDP decreased .
Points:
1 / 1
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Explanation:
Nominal GDP in 2011 increased to $1,170 from its value of $1,120 in 2010, and real GDP in 2011
decreased to $520 from its value of $560 in 2010. (Note: Because GDP is thought to be the best
single measure of a society’s economic well-being, it is the most closely watched economic statistic.)
The inflation rate in 2011 was 12.5% .
Points:
1 / 1
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Explanation:
The inflation rate in a given year is estimated by the percentage change in the GDP deflator between
that year and the previous year. Therefore, you can compute the inflation rate in 2011 in the following
way:
Why is real GDP a more accurate measure of an economy's production than nominal GDP?
Real GDP does not include the value of intermediate goods and services, but nominal GDP does.
Real GDP is not influenced by price changes, but nominal GDP is.
Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.
Points:
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Explanation:
Real GDP is the value of an economy's output after the impact of price changes has been
removed. Nominal GDP is the value of an economy's output measured in current prices. Therefore,
nominal GDP rises and falls with price changes and may provide a misleading indication of whether
output is increasing or decreasing. [Show Less]