Question

5. 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)
2018	1	150	2	160
2019	2	135	4	230
2020	3	110	4	165

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

Year	Nominal GDP	Real GDP	GDP Deflator
	(Dollars)	(Base year 2018, dollars)
2018
2019
2020

Answer 1

Nominal GDP = Current Year Price * Current Year Quantity.

Real GDP = Base Year Price * Current Year Quantity.

Year 2018

Nominal GDP = ($1) (150) + ($2) (160)

Nominal GDP = $150 + $320

Nominal GDP = $470

Real GDP =($1) (150) + ($2) (160)

Real GDP =$150 + $320

Real GDP = $470

Year 2019

Nominal GDP = ($2) (135) + ($4) (230)

Nominal GDP = $270 + $920

Nominal GDP = $1190

Real GDP = ($1) (135) + ($2) (230)

Real GDP = $135 + $460

Real GDP = $595

Year 2020

Nominal GDP = ($3) (110) + ($4) (165)

Nominal GDP = $330 + $660

Nominal GDP = $990

Real GDP = ($1) ((110) + ($2) (165)

Real GDP = $110 + $330

Real GDP = $440

GDP Deflator = (Nominal GDP / Real GDP) *100

Year	Nominal GDP ($)	Real GDP (Base year 2018, dollars)	GDP Deflator
2018	470	470	100
2019	1190	595	200
2020	990	440	225