Question

The island of Maltana produces beer, pizza and pretzels. Here are the data on prices and quantities of the three goods in the years 2007 and 2017.

1. What is nominal GDP for 2007 and 2017? What is nominal GDP growth? What is the growth rate of nominal GDP?
2. Assume 2007 is the base year. What is real GDP for 2007 and 2017? What is real GDP growth?
3. Find the implicit price deflator for 2007 and 2017. What is the inflation rate between these two years?

	Pizza		Beer		Pretzels
Year	Quantity	Price	Quantity	Price	Quantity	Price
2007	300	2	700	1	400	2
2017	400	3	800	2	400	1

Answer 1

Nominal GDP = sum of current year price * current year quantity of all the goods

Nominal GDP of 2007 = (300*2) + (700*1) + (400*2) =

600 + 700 + 800

=2100

Nominal GDP of 2017 = (400*3) + (800*2) + (400*1)

=1200 + 1600 + 400

=3200

The Nominal GDP growth is the GDP of the country which is measured in terms of current market prices.

Nominal GDP growth = NGDPx -NGDP_x-1 / NGDP_x-1

= 3200 - 2100 / 2100

= 0.52 = 52%

Real GDP = Sum of base year price *current year quantity of all goods

Real GDP of 2007 = (300*2) + (700*1) + (400*2)

= 600 + 700 + 800

= 2100

Real GDP of 2017 = (400*2) + (800*1) + (400*2)

= 800 + 800 + 800

= 2400

Real GDP growth with base year 2007 = 2400-2100 / 2100

= 14%

Implicit Price Deflator is the ratio between Nominal GDP to Real GDP , that is Nominal GDP/Real GDP

Implicit Price Deflator for 2007 = 2100 / 2100 = 1 = 100%   

   Implicit Price Deflator for 2017 = 3200 / 2400 = 1.33 = 133%