1. Calculating GDP - We would like to compare the methods in calculating the GDP
ID: 1144876 • Letter: 1
Question
1. Calculating GDP - We would like to compare the methods in calculating the GDP using the product and income approaches. Suppose there are three goods produced by three producers in a closed- economy - Tomato, Cheese, and Margherita Pizza. The tomato farmer plants and harvest the tomatoes in his field The cheesemonger produces cheese from the cows in his farm. The pizza producer reports that he makes the dough by himself using flour milled in his backyard, but eacih pizza pie is made from 0.5 lbs of tomato and 0.25 lbs of cheese. The following table shows the total and price of each good produced in each year. 2016 2017 Price Quantit Price Quantit Tomato 200 lbs Cheese $2/lb100 lbs $2.2 lb 110 lbs Margherita Pizza $10/pie 100 pies $9/pie120 pies (a) Let 2016 be the base year, calculate nominal GDP and real GDP for each year using the traditional method. (b) Calculate the growth rates of nominal GDP and real GDP. (c) Calculate the GDP deflator for each year. What is the inflation rate in 2017?Explanation / Answer
a
2016
2017
2016
2017
Price
Quantity
Price
Quantity
Nominal GDP
Real GDP
Nominal GDP
Real GDP
Tomato
1
200
0.9
210
200
200
189
210
Cheese
2
100
2.2
110
200
200
242
220
M Pizza
10
100
9
120
1000
1000
1080
1200
Total
1400
1400
1511
1630
b
Growth rate
7.93%
16.43%
c
GDP deflator
100
92.70%
Inflation
-7.30%
a. Nominal GDP= quantity*price
Real GDP = quantity*base price
b. Real GDP growth rate = (1630-1400)/1400 = 16.43%
Nominal GDP g r = (1511-1400)/1400 = 7.93%
c. GDP deflator = (Nominal/Real GDP)*100 =(1511/1630)*100 = 92.7%
Inflation = (92.7-100)/100 = -7.30%
a
2016
2017
2016
2017
Price
Quantity
Price
Quantity
Nominal GDP
Real GDP
Nominal GDP
Real GDP
Tomato
1
200
0.9
210
200
200
189
210
Cheese
2
100
2.2
110
200
200
242
220
M Pizza
10
100
9
120
1000
1000
1080
1200
Total
1400
1400
1511
1630
b
Growth rate
7.93%
16.43%
c
GDP deflator
100
92.70%
Inflation
-7.30%
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