Question

A country reported nominal GDP of $100 billion in 2010 and $75 billion in 2009. It...

A country reported nominal GDP of $100 billion in 2010 and $75 billion in 2009. It also reported a GDP deáator of 125 in 2010 and 120 in 2009. Based on this information, what happened to

  1. Real output between 2009 and 2010?

  2. Prices between 2009 and 2010?

  3. Can you conclude whether the economy is better or worse of in 2010 relative to 2009?

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Answer #1

Real GDP for 2009 = Nominal * 100/Deflator

= 75*100/120

= 7500/120

= 62.5

Real GDP for 2010 = 100*100/125

= 10000/125

= 80

Increase in the real GDP and the increased value of Deflator in comparison to 2009 signify the increase in the rate of inflation in economy.

Due to the increase in rate of inflation , the price levels will rise in 2010 as compared to 2009 and the inflation makes the economy worse off in 2010 as compared to 2009 and not better off and the value of money falls.

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