Question

- 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.

- What is the nominal GDP in each period?
- What is the nominal GDP growth?
- What is the real GDP in each period (using the first year as the base year)?
- 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.

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