For BUSC 1A Chapter 7 (6) Homework: Macroeconomic Measurements, Part II: GDP and

ID: 1139464 • Letter: F

Question

For BUSC 1A Chapter 7

(6)

Homework: Macroeconomic Measurements, Part II: GDP and Real GDP (Ch 07) Consider a simple economy that produces two goods: apples and oranges. The following table shows the prices and quantities of the goods over a three-year period Apples Oranges Price Quantity (Number of apples) 150 135 110 Price Quantity (Number of oranges) 160 230 165 (Dollars per apple) (Dollars per orange) Year 2010 2011 2012 4 4 Use the information from the previous table to fill in the following table. GDP Real GDP Yea (Dollars) (Base year 2010, dollars) 2010 2011 2012 From 2011 to 2012, GDP and real GDP Why is real GDP a more accurate measure of an economy's production than GDP?

Explanation / Answer

GDP (Gross Domestic product) is the money value of all goods and service produced within the domestic territory of a country during an accounting year.

The GDP can be measure in current year price and base year price. The GDP measured at current year price is known as Nominal GDP. The GDP measured at constant(base year) price is known as Real GDP.

Nominal GDP refers to the market value of all final goods and services produced within the domestic territory of a country during an accounting year, as estimated using the current year price. It may increase without any increase in the quantity of output in the economy. It is otherwise known as GDP at current prices.

The Real GDP refers to the market value of all final goods and services produced within the domestic territory of a country during an accounting year, as estimated using the base year prices. It increases only when there is an increase in the quantity of output in the economy. It is otherwise known as GDP at constant prices.

To get Nominal GDP multiply the current year price with the quantity produced. To get Real GDP multiply the base year price with the current year quantity. The real GDP and Nominal GDP will be the same in the base year. The real GDP is calculated in terms of the price in the base year. Here the base year is 2010.

Year

GDP (Dollars)

Real GDP

(Base Year 2010, in dollars

2010

470

2011

1190

595

2012

990

440

From 2011 to 2012 GDP fall and real GDP decrease.

The Real GDP only measures the increase in value due to increase in production. It excludes the increase in value due to inflation. In other words the index of Real GDP always reflects a change in the level of output, while the index of Nominal GDP may or may not. Therefore the index of Real GDP is considered as a better index of economic growth than Nominal GDP.

Answer: Real GDP is not influenced by the price changes, but GDP is.