2 Nominal and Real GDP Calculation and Growth Use the data below to calculate no

ID: 1167698 • Letter: 2

Question

2 Nominal and Real GDP Calculation and Growth

Use the data below to calculate nominal and real GDPs for each year. Be sure for the

real GDP calculation to repeat using both years as the base. Then, determine growth

rates using each year as the base year. Calculate chain-weighted GDP growth rate.

Lastly, explain in plain English why chain-weighted GDP growth rate is used.

1985 1986 Q2 Qi 5000$10000$11000 DMC-12 Nintendo Entertainment System100$200100000 $185 LP CD 100000%150000%1 5000 $20 50000$20

Nominal GDP = Sum of (Correct quantity x Current price)

For 1985:

= $(5,000 x 10,000 + 100 x 200 + 100,000 x 1 + 5,000 x 20)

= $50,220,000 = $50.22 million

For 1986:

= $(1 x 11,000 + 100,000 x 185 + 50,000 x 1 + 50,000 x 20)

= $19.56 million

Real GDP = Sum of (Base year price x current year quantity)

1985:

= $50.22 million

1986:

= $(100,000 x 1 + 200 x 100,000 + 1 x 50,000 + 20 x 50,000)

= $21.06 million

Chain-weighted GDP growth rate:

Nominal GDP, 1985 = $50.22 mill

Nominal GDP, 1986 = $19.56 mill

Real GDP, 1986 = $21.06 mill

Sum of base quantity at current prices = $(5,000 x 11,000 + 100 x 185 + 100,000 x 1 + 5,000 x 20)

= $55.22 mill

So:

Growth rate of GDP (1985 prices) = (21.06 - 50.22) / 50.22 x 100 = - 58.06%

Growth rate of GDP (1986 prices) = (19.56 - 55.22) / 55.22 x 100 = - 64.58%

Average of the two growth rates = - (58.06 + 64.58)% / 2 = - 61.32%

The chain-weighted rate is used to utilize current year price to calculate real growth in that year.

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