5. Real versus nominal GDP Consider a simple economy that produces two goods: ap

Question

5. Real versus nominal GDP Consider a simple economy that produces two goods: apples and erasers. The following table shows the prices and quantities of the goods over a three-year period Apples Erasers Price (Dollars per apple) Year 2012 2013 2014 Quantity (Number of apples) 150 135 110 Price (Dollars per eraser) 2 4 4 Quantity (Number of erasers) 160 230 165 2 Use the information from the preceding table to fill in the following table Real GDP (Base year 2012, dollars) Nominal GDP Year(Dollars) 2012 2013 2014 GDP Deflator From 2013 to 2014, nominal GDP ,and real GDP The inflation rate in 2014 was 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 Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not Real GDP is not influenced by price changes, but nominal GDP is

Explanation / Answer

2012 2013 2014 Nominal GDP Real GDP Price Qty Price Qty Price Qty 2012 2013 2014 2012 2013 2014 Apples 1 150 2 135 3 110 150 270 330 150 135 110 Erasers 2 160 4 230 4 165 320 920 660 320 460 330 470 1190 990 470 595 440 Year Nominal GDP Real GDP GDP deflator (Nominal GDP/ Real GDP) 2012 470 470 1 2013 1190 595 2 2014 990 440 2.25 From 2013 to 2014, Nominal GDP falls and real GDP also falls. The inflation rate in 2014 is 12.50% Real GDP is more accurate measure: Real GDP is not influenced by price changes, but nominal GDP is.

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