Question

2. Suppose that a simple economy produced only three goods: wheat, automobiles, and houses. The table below lists the quantity and prices for each of the goods for year 2000 and 2010. Based on table, answer the following questions:

	Quantity produced in 2000	Price in 2000	Quantity produced in 2010	Price in 2010
Wheat	100	$5	100	$10
Milk	20	$3	20	$6
Chairs	4	$50	4	$100

a) Calculate nominal GDP in year 2000.

b) Calculate nominal GDP in year 2010

c) Explain whether real GDP has risen, fallen or stayed the same from 2000 to 2010. Show your work.

Answer 1

Nominal GDP is the value of final goods and services produced in a country at current prices. For calculating nominal GDP, we only use current quantities at current year prices.

a)Nominal GDP in year 2000= 100*5+20*3+4*50= $760.

b)Nominal GDP in year 2010= 100*10+20*6+4*100= $1,520.

c)Real GDP measures a country’s output in terms of the value of its goods and services. Here we can see that quantity of various goods produced the given economy has remained same between 2000 to 2010. There is no increase or decrease in the quantity of goods produced. The change is observed only in the price and not real output. Hence the real GDP of the economy has stayed the same from 2000 to 2010.