Question

Gross Domestic Product is the sum total value of all final goods and services produced and sold on an organized market during a specified period of time.

Suppose that, in 2014, Latveria produced one car priced at 10000 and two bicycles priced at 500 each and nothing else. Then, adding these values, its nominal GDP in 2014 was 11000.

Suppose that, in 2015, Latveria produced one car priced at 12000 and one bicycle priced at 1000 and nothing else. What was its nominal GDP, using these prices?
$ Blank 1. Fill in the blank, read surrounding text.

Often, we might want to compare GDP across time to see if the economy is "growing". Because prices tend to change (inflation), it is useful to calculate "real GDP" using a fixed set of prices.

To compare Latverian GDP in 2015 with GDP in 2014, calculate its GDP in 2015 using prices from 2014. This is Real Latverian GDP for 2015 in 2014 dollars.

It is $ Blank 2. Fill in the blank, read surrounding text. (do not use a comma in your response).

Then you see that nominal GDP went up, but real GDP went down.

Answer 1

Calculate the nominal GDP of Latveria -

Nominal GDP = [Number of cars produced in 2015 * Price of car in 2015] + [Number of bicycles produced in 2015 * Price of bicycles in 2015]

Nominal GDP = [1 * $12,000] + [1 * $1,000] = $12,000 + $1,000 = $13,000

The nominal GDP of Latveria in 2015 is $13,000

Calculate the real GDP of Latveria -

Real GDP = [Number of cars produced in 2015 * Price of car in 2014] + [Number of bicycles produced in 2015 * Price of bicycles in 2014]

Real GDP = [1 * $10,000] + [1 * $500] = $10,000 + $500 = $10,500

The real GDP of Latveria in 2015 is $10,500