Question

Below are some data from the land of milk and honey.

Year	Price of Milk	Quantity of Milk	Price of Honey	Quantity of Honey
2014	$1	100	$2	50
2015	$2	200	$3	100
2016	$3	300	$4	150

1. Compute Nominal GDP for each year.
2. Compute Real GDP for each year.
3. Compute the GDP Deflator for each year.

Answer 1

Let is assume 2014 is the base year

a. Nominal GDP:

2014: (1*100) + (2*50) = 200

2015: (2*200) + (3*100) = 700

2016: (3*300) + (4*150) = 1500

b. Real GDP:

2014: nominal gdp = real gdp as it is the base year

So, real GDP = nominal GDP = 200

2015: real GDP of 2015 is quantity of 2015*price of 2014

= (1*200) + (2*100) = 400

2016: real GDP of 2016 is quantity of 2016 * price of 2014

= (1*300) + (2*150) = 600

c. GDP deflator

GDP deflator = (Nominal GDP/ Real GDP) * 100

For the base year, as nominal gdp=real gdp, deflator is always 100.

deflator for 2014 = (200/200) *100 = 100

deflator for 2015 = (700/400) * 100 = 175

deflator for 2016 = (1500/600) * 100 = 250