Question

A closed economy produces and consumes 100 apples at $1 each and 100 bananas at $1 each. Then hot weather causes production of apples to halve, price of apples to double, production of bananas to double, price of bananas to halve. Calculate the percentage changes in: nominal GDP; real GDP; GDP deflator; CPI.

Answer 1

Solution:

	Apples Quantity	Apple Price	Banana Quantity	Banana Price	Nominal GDP	Real GDP
Year 1	100	1	100	1	100*1 + 100*1 = 200	100*1 + 100*1 = 200
Year 2	50	2	200	0.5	50*2 + 200*0.5 = 200	50*1 + 200*1 =250
					400	450

% change in real GDP: 250 -200 / 200 *100 = 25%

% change in nominal GDP: 200 - 200 / 200 * 100 = 0%

GDP Deflator = [Nominal GDP / Real GDP] x 100 = 200 / 250 * 100 = 80

CPI = 450/400 * 100= 112.5