Consider an economy that produces only chocolate bars. In year 1, the quantity p
ID: 1205199 • Letter: C
Question
Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6.
Using year 1 as the base year, compute nominal GDP, real GDP, and the GDP deflator for each year.
The percentage growth rate of real GDP from year 2 to year 3 is. ______%
The inflation rate as measured by the GDP deflator from year 2 to year 3 is. ______%
Year Nominal GDP Real GDP GDP Deflator (Dollars) (Dollars) Year 1 Year 2 Year 3Explanation / Answer
Real GDP = Nominal GDP / GDP Deflator
(1) Nominal GDP ($) [Current year quantity x Current year price]
Year 1: 3 x 4 = 12
Year 2: 4 x 5 = 20
Year 3: 5 x 6 = 30
(2) Real GDP ($) [Current year quantity x Base year price]
Year 1: 3 x 4 = 12
Year 2: 4 x 4 = 16
Year 3: 5 x 4 = 20
(3) GDP Deflator = Nominal GDP / Real GDP
Year 1: 12 / 12 = 1
Year 2: 20 / 16 = 1.25
Year 3: 30 / 20 = 1.5
(4) % growth in real GDP (year 2 to 3) = (16 / 12) - 1 = 1.3333 - 1 = 0.3333, or 33.33%
(5) Inflation rate (year 2 to 3) = (1.5 / 1.25) - 1 = 1.2 - 1 = 0.2, or 20%