Real versus nominal GDP Consider a simple economy that produces two goods: apple
ID: 1155498 • Letter: R
Question
Real versus nominal GDP
Consider a simple economy that produces two goods: apples and muffins. The following table shows the prices and quantities of the goods over a three-year period.
Apples
Muffins
Use the information from the preceding table to fill in the following table.
From 2015 to 2016, nominal GDP (decreased, increased) , and real GDP (decreased, increased) .
The inflation rate in 2016 was (-12.5%, 0.1%, 12.5%, 88.9%, 112.5%) .
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.
Real GDP includes the value of exports, but nominal GDP does not.
Real GDP is not influenced by price changes, but nominal GDP is.
YearApples
Muffins
Price Quantity Price Quantity (Dollars per apple) (Number of apples) (Dollars per muffin) (Number of muffins) 2014 1 110 2 150 2015 2 155 4 215 2016 3 120 4 180Explanation / Answer
2014 Base Year
2015
2016
Quantity
Price
Value
Quantity
Price
Value
Quantity
Price
Value
Apples
110
1
110
155
2
310
120
3
360
Muffins
150
2
300
215
4
860
180
4
720
Nominal GDP
410
1170
1080
2015
2016
Quantity
Price of 2014
Value
Quantity
Price
Value
155
1
155
120
1
120
215
2
430
180
2
360
REAL GDP
585
480
Year
Nominal GDP
Real GDP
GDP Deflator
(Dollars)
(Base year 2014, dollars)
2014
410
410
100
2015
1170
585
200
2016
1080
480
225
From 2015 to 2016, nominal GDP decreased, and real GDP decreased.
The inflation rate in 2016 was 12.5%
Inflation = 225 – 200 / 200 * 100 = 12.5%
Why is real GDP a more accurate measure of an economy's production than nominal GDP?
Real GDP is not influenced by price changes, but nominal GDP is.
2014 Base Year
2015
2016
Quantity
Price
Value
Quantity
Price
Value
Quantity
Price
Value
Apples
110
1
110
155
2
310
120
3
360
Muffins
150
2
300
215
4
860
180
4
720
Nominal GDP
410
1170
1080
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