Suppose that the economy produces two goods: coffee (in cups) and cookies. The p
ID: 1189301 • Letter: S
Question
Suppose that the economy produces two goods: coffee (in cups) and cookies. The price of a cup of coffee is fixed at $2 and the price of a cookie is fixed at $3.
a) In 2013, the economy produced 2000 coffees and 3000 cookies. Calculate the economy’s nominal GDP.
b) In 2014, the economy produced 2500 coffees and 2600 cookies. Calculate the economy’s growth in nominal GDP from 2013 to 2014.
c) In 2015, the economy produced 2500 coffees and 2600 cookies, but the price of cookies rose from $3 to $3.50. Calculate the economy’s growth in nominal GDP from 2014 to 2015.
Explanation / Answer
Nominal GDP is the value of goods and services produced in the economy. Here we have only two goods.
Pa = 2 Pb = 3
a) We have:
Qa = 2000 Qb = 3000
Nominal GDP= Pa x Qa + Pb x Qb
= 2 x 2000 + 3x3000
= 13,000
b) We have
Qa = 2500 Qb = 2600
Nominal GDP= Pa x Qa + Pb x Qb
= 2 x 2500 + 3x2600
= 12,800
Growth in nominal GDP = GDP in 2014/ GDP in 2013 -1
= 12,800/13,000 -1
= -1.54%
c) We have:
Qa = 2500 Qb = 2600
Nominal GDP= Pa x Qa + Pb x Qb
= 2 x 2500 + 3.50x2600
= 14100
Growth in nominal GDP = GDP in 2015/ GDP in 2014 -1
= 14100/12,800 -1
= 10.16%
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