Question

Real versus nominal GDP Consider a simple economy that produces two goods: cupcakes and muffins. The following table shows the prices and quantities of the goods over a three-year period.

Year	Cupcakes		Muffins
	Price	Quantity	Price	Quantity
	(Dollars per cupcake)	(Number of cupcakes)	(Dollars per muffin)	(Number of muffins)
2012	1	120	1	195
2013	2	130	4	195
2014	4	130	4	145

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

Year	Nominal GDP	Real GDP	GDP Deflator
	(Dollars)	(Base year 2012, dollars)
2012	-----	-----	-----
2013	-----	-----	-----
2014	-----	-----	-----

From 2013 to 2014, nominal GDP(decreased/increased), and real GDP (decreased/increased) .

The inflation rate in 2014 was (-25%, 0.3%, 25%, 80%,125%) -which one

   .

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

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

b.) 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.

c.) Real GDP includes the value of exports, but nominal GDP does not.

Answer 1

Nominal GDP = Current Year Price x Current Year Quantity

Real GDP = Base Year Price x Current Year Quantity

GDP Deflator = Nominal GDP/Real GDP x 100

Year	Nominal GDP	Real GDP	GDP Deflator
2012	1 x 120 + 1 x 195 = 315	1 x 120 + 1 x 195 = 315	100
2013	2 x 130 + 4 x 195 = 1040	1 x 130 + 1 x 195 = 325	320
2014	4 x 130 + 4 x 145 = 1100	1 x 130 + 1 x 145 = 275	400

From 2013 to 2014, Nominal GDP increased.

Real GDP decreased

Inflation Rate in 2014 = (400 - 320)/320 x 100 = 25%

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