Calculating Nominal GDP Assignment Paper

## Question

Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year. (12 marks)

a. What is nominal GDP for each of these three years?

b. What is real GDP for each of these years?

c. What is the GDP deflator for each of these years?

d. What is the percentage growth rate of real GDP from year 2 to year 3?

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e. What is the inflation rate as measured by the GDP deflator from year 2 to year 3?

f. In this one-good economy, how might you have answered parts (d) and (e) without first answering parts (b) and (c)? Calculating Nominal GDP Assignment Paper

### Step-by-step

**Step 1/6**

**a)**. To calculate nominal GDP for each year, we can use the formula:

**nominal GDP = quantity of goods produced × price of goods.**Year 1: Nominal GDP = 3 bars × $4/bar =

**$12**Year 2: Nominal GDP = 4 bars × $5/bar =

**$20**Year 3: Nominal GDP = 5 bars × $6/bar =

**$30**

- Explanation for step 1

**Step 2/6**

**b.)**To calculate real GDP for each year, we need to use a constant price, which we choose to be the price in year 1. We can use the formula:

**real GDP = quantity of goods produced in a given year × base-year price.**Year 1: Real GDP = 3 bars × $4/bar =

**$12**Year 2: Real GDP = 4 bars × $4/bar =

**$16**Year 3: Real GDP = 5 bars × $4/bar =

**$20Calculating Nominal GDP Assignment Paper**

- Explanation for step 2

**c.)**

**The GDP deflator is the ratio of nominal GDP to real GDP, multiplied by 100 to express it as a percentage.**Year 1: GDP deflator = (Nominal GDP / Real GDP) × 100 = ($12 / $12) × 100 =

**100**Year 2: GDP deflator = (Nominal GDP / Real GDP) × 100 = ($20 / $16) × 100 =

**125**Year 3: GDP deflator = (Nominal GDP / Real GDP) × 100 = ($30 / $20) × 100 =

**150**

- Explanation for step 3

**Step 4/6**

**d.)**The percentage growth rate of real GDP from year 2 to year 3 can be calculated using the formula:

**((Real GDP in year 3 – Real GDP in year 2) / Real GDP in year 2) × 100.**The percentage growth rate of real GDP from year 2 to year 3 = ((Real GDP in year 3 – Real GDP in year 2) / Real GDP in year 2) × 100 = ($20−$16$16)×100 =

**25%**

- Explanation for step 4

**Step 5/6**

**e.)**The inflation rate as measured by the GDP deflator from year 2 to year 3 can be calculated using the formula:

**((GDP deflator in year 3 – GDP deflator in year 2) / GDP deflator in year 2) × 100.**Inflation rate as measured by the GDP deflator from year 2 to year 3 = ((GDP deflator in year 3 – GDP deflator in year 2) / GDP deflator in year 2) × 100 = (150−125125)×100 =

**20% Calculating Nominal GDP Assignment Paper**

- Explanation for step 5

**Step 6/6**

**f.)**In this one-good economy, we can directly

**compare the price of chocolate bars in year 2 and year 3 to calculate the percentage change in price**, and use

**the percentage change in quantity produced to calculate the percentage change in real GDP**. Then, we can use these values to answer parts (d) and (e). The percentage growth rate of real GDP from year 2 to year 3 =

**((Quantity of goods produced in year 3 – Quantity of goods produced in year 2) / Quantity of goods produced in year 2) × 100**= (5−44)×100 =

**25%**Inflation rate as measured by the GDP deflator from year 2 to year 3 =

**((Price of goods in year 3 – Price of goods in year 2) / Price of goods in year 2) × 100**= (6−55)×100=

**20%**

- Explanation for step 6

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