Question

Consider a simple economy that produces two goods: pens and erasers. The following table shows the prices and quantities of the goods over a three-year period.

Year	Pens		Erasers
	Price	Quantity	Price	Quantity
	(Dollars per pen)	(Number of pens)	(Dollars per eraser)	(Number of erasers)
2013	1	110	2	185
2014	2	155	4	200
2015	3	110	4	165

Use the information from the preceding table to fill in the following table.

Year	Nominal GDP	Real GDP	GDP Deflator
	(Dollars)	(Base year 2013, dollars)
2013
2014
2015

From 2014 to 2015, nominal GDP   , and real GDP   .

The inflation rate in 2015 was   .

Why is real GDP a more accurate measure of an economy's production than nominal GDP?

Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is 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 consumes.

Real GDP is not influenced by price changes, but nominal GDP is.

Answer 1

Nominal GDP = Current year price x Current year quantities

Real GDP = Base year price x Current year quantity

Nominal GDP 2013 = 1 x 110 + 2 x 185 = 110 + 370 = 480

Nominal GDP 2014 = 2 x 155 + 4 x 200 = 310 + 800 = 1110

Nominal GDP 2015 = 3 x 110 + 4 x 165 = 330 + 660 = 990

Real GDP 2013 = 1 x 110 + 2 x 185 = 110 + 370 = 480

Real GDP 2014 = 1 x 155 + 2 x 200 = 155 + 400 = 555

Real GDP 2015 =  1 x 110 + 2 x 165 = 110 + 230 = 340

GDP deflator = Nominal GDP / Real GDP x 100

GDP deflator 2013 = 480/480 x 100 = 100

GDP deflator 2014 = 1110/555 x 100 = 200

GDP deflator 2015 = 990/340 x 100 = 291.18

From 2014 to 2015; Nominal GDP decreases Real GDP decreases.

Inflation rate = (Nominal GDP - Real GDP)/Real GDP x 100 = (990 - 340)/340 x 100 = 191.18

Real GDP is not influenced by price changes, but nominal GDP is.