Real versus nominal GDP Consider a simple economy that produces two goods: cupca
ID: 1206695 • Letter: R
Question
Real versus nominal GDP
Consider a simple economy that produces two goods: cupcakes and erasers. The following table shows the prices and quantities of the goods over a three-year period.
Year
Cupcakes
Erasers
Price
Quantity
Price
Quantity
(Dollars per cupcake)
(Number of cupcakes)
(Dollars per eraser)
(Number of erasers)
Use the information from the previous table to fill in the following table.
Year
Nominal GDP
Real GDP
(Dollars)
(Base year 2010, dollars)
From 2011 to 2012, nominal GDP (increased/decreased) , and real GDP (increased/decreased) .
Why is real GDP a more accurate measure of an economy's production than nominal GDP?
Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.
Real GDP is not influenced by price changes, but nominal GDP is.
Real GDP does not include the value of intermediate goods and services, but nominal GDP does.
Year
Cupcakes
Erasers
Price
Quantity
Price
Quantity
(Dollars per cupcake)
(Number of cupcakes)
(Dollars per eraser)
(Number of erasers)
2010 2 125 3 155 2011 4 135 3 210 2012 2 125 3 165Explanation / Answer
From 2011 to 2012, nominal GDP decreased , and real GDP decreased.
Real GDP is not influenced by price changes, but nominal GDP is.
Explanation: The difference between real and nominal GDP is inflation. Nominal GDP - Inflation = real GDP. So nominal GDP includes both growth and price change (inflation). Real GDP only includes growth.
Year Nominal GDP Real GDP ($) (Base year 2010, dollars) 2010 715 [i.e. (2*125)+(3*155) 715 [i.e. (2*125)+(3*155) 2011 1170 [i.e. (4*135)+(3*210) 900 [i.e. (2*135)+(3*210) 2012 745 [i.e. (2*125)+(3*165) 745 [i.e. (2*125)+(3*165)Related Questions
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