Question

Consider the following table which shows the prices and quantities of economy G. Use 2012 as the base year.

Good	2012 price	2012 quantity	2013 price	2013 quantity
A	$2	250	$3	200
B	$3	300	$4	300
C	$4	400	$5	350
D	$3	200	$6	180

1. Calculate nominal GDP in 2013

2. Calculate real GDP in 2013

3. Does real GDP increase or decrease between 2012 and 2013? Explain without calculations.

Answer 1

A)

Nominal GDP refers to sum over all goods P_current * Q_current

Hence Nominal GDP₂₀₁₃ = Summation (P₂₀₁₃ * Q₂₀₁₃) = (3*200)+(4*300) +(5*350)+(6*180)

= 600 + 1200 + 1750 + 1080 = $4630

B) Real GDP refers to sum over all goods P_base * Q_current

base year = 2012

Real GDP₂₀₁₃ = P₂₀₁₂*Q₂₀₁₃ = (2*200)+(3*300)+(4*350)+(3*180) = 400+900+1400+540 = 3240

C)

Since for real GDP, price is constant and it will change only when there will a change in the quantity.

Looking the respective quantity of A,B,C,D, we can see that qty of A, C, D has been decreased in 2013 as compared to 2012 but quantity of B remains same. Hence real GDP should decrease in the 2013 as compared to 2012.