4. An island economy produces only lamps and books. The table gives the quantiti

Question

4. An island economy produces only lamps and books. The table gives the quantities produced and the prices in 2001, and the quantities produced and the prices in 2002 2001 2002 Item Quantity Price QuantityPrice $15 $20 Lamps 100 $20 $25 90 Books 20 25 The base year is 2001. Calculate: a. Nominal GDP in 2001 b. Nominal GDP in 2002 c. The value of 2002 production in 2001 prices. d. Percentage increase in production when valued at 2001 prices. e. The value of 2001 production in 2002 prices. f. Percentage increase in production when valued at 2002 prices. g. Real GDP in 2001 and 2002

Explanation / Answer

e) Value of 2001 production in 2002 prices = Quantity of 2001 x Price in 2002 = 90 x 20 + 20 x 25 = 1800 + 500 = $ 2300

f) Nominal GDP in 2001 = 90 x 15 + 20 x 20 = 1350 + 400 = 1750

Percentage increase = (2300 - 1750)/1750 x 100 = 550/1750 x 100 = 31.43%

g) Real GDP in 2001 = Price in base year x Quantity in 2001 = 90 x 15 + 20 x 20 = 1350 + 400 = 1750

Real GDP in 2002 = Price in base year x Quantity in 2002 = 100 x 15 + 25 x 20 = 1500 + 500 = 2000

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