Question

1. On the island of Sandland, there is no currency but only coconuts and seashells. During the first year, the island gathered 10 coconuts and 60 seashells. A coconut is worth 7 seashells.

During year 2, the island gathered 8 coconuts and 54 seashells. However, a coconut is now worth 12 seashells. Everything can be express in term of seashells.

1. What is the nominal GDP in each period?
2. What is the nominal GDP growth?
3. What is the real GDP in each period (using the first year as the base year)?
4. What is the real GDP growth?

What can you conclude about the state of the economy on the island?

Answer 1

Part a

Nominal GDP

First Year

1 Coconut = 7 Seashells

10 Coconut = 10 * 7 = 70 Seashells

Nominal GDP = 70 Seashells+ 60 Seashells = 130 Seashells

Second Year

12 Seashells = 1 Coconut

8 Coconut = 8 * 12 = 96 Seashells

Nominal GDP = 96 + 54 = 150 Seashells

Part b

Nominal GDP Growth

= (150 - 130) / 130 * 100

= 20 / 130 * 100

= 15.4%

Part c

Real GDP

First Year

Both Real GDP and Nominal GDP are same because first year is base year

Real GDP = 130 Seashells

Second Year

1 Coconut= 12 Seashells

54 Seashells = 54/12 Coconuts = 5 Coconuts (approx)

Total Coconuts in Year2:= 8 + 5 = 13 Coconuts

As per base year we get

13 * 7 = 91 Seashells

Real GDP year 2

= 91 Seashells

Part d

Growth Rate Real GDP = (91 - 130) / 130 * 100

= -39 / 130 * 100 = -30%

Economy is declining.