Consider a simple economy that produces two goods: pencils and erasers. The foll
ID: 1158294 • Letter: C
Question
Consider a simple economy that produces two goods: pencils and erasers. The following table shows the prices and quantities of the goods over a three-y ear period. Pencils Erasers Price Price Quantity (Number of pencils) 150 135 110 Quantity (Number of erasers) 160 230 165 (Dollars per pencil) (Dollars per eraser) Year 2012 2013 2014 Use the information from the preceding table to fill in the following table. Nominal GDP Real GDP (Dollars) (Base year 2012, dollars) GDP Deflator Year 2012 2013 2014 From 2013 to 2014, nominal GDP and real GDP The inflation rate in 2014 was 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. O Real GDP includes the value of exports, but nominal GDP does not. Real GDP measures the value of the goods and services an economy produces, but nominal GDP measures the value of the goods and services an economy consumesExplanation / Answer
(1) Nominal GDP (NGDP) = Sum of (Current year price x Current year quantity)
2012 ($): 1 x 150 + 2 x 160 = 150 + 320 = 470
2013 ($): 2 x 135 + 4 x 230 = 270 + 920 = 1190
2014 ($): 3 x 110 + 4 x 165 = 330 + 660 = 990
(2) Real GDP (RGDP) = Sum of (Base year (2012) price x Current year quantity)
2012 ($): 1 x 150 + 2 x 160 = 150 + 320 = 470
2013 ($): 1 x 135 + 2 x 230 = 135 + 460 = 595
2014 ($): 1 x 110 + 2 x 165 = 110 + 330 = 440
(3) GDP Deflator = (NGDP / RGDP) x 100
2012: ($470/$470) x 100 = 100
2013 ($1190 / $595) x 100 = 200
2013: ($990/$440) x 100 = 225
(4) From 2013, to 2014, Nominal GDP decreased and real GDP decreased.
(5) Inflation rate = % Change in GDP Deflator = (225/200) - 1 = 1.125 - 1 = 0.125 = 12.5%
(6) Real GDP is more accurate because
- Real GDP is not influenced by price changes but nominal GDP is.