Question

The following table gives information on nominal GDP (in billions of $) and the GDP deflator (base year = 2009):

Year	NGDP	Deflator	RGDP
1950 2000 2015	300 10,252 18,219	13.064 78.069 104.757

a.   Fill in the values for real GDP.

b. Using the growth formula that we identified in class, calculate the average annual rates of nominal and real GDP growth from 1950 to 2000 (n = 50 years). Which do you think gives a better indicator of true growth in economic activity? Why?

c.   Calculate the average annual rate of real GDP growth from 2000 to 2015 (n = 15 years).

Compare this to the real GDP growth between 1950 and 2000 that you found in part b. If we accept the 50-year annual growth rate from part a to reflect an expected long-run growth rate for the US economy, did the US economy grow faster, slower, or about the same during the 2000s relative to the long-run trend?

Answer 1

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

b.

Year	NGDP	Deflator	RGDP	NGDP Growth rate	RGDP Growth rate
1950	300	13.064	39.19
2000	10,252	78.069	8003.63	7.32%	11.22%
2015	18,219	104.757	19085.68	3.91%	5.96%

NGDP growth rate for 2000 and 1950 = ((10252/300)^(1/50)-1)*100 = 7.32%

RGDP growth rate for 2000 and 1950 = ((8003.63/39.19)^(1/50)-1)*100 = 11.22%

RGDP is the better indicator as it takes inflation into account whereas NGDP neglects the effect of price level

c.

NGDP growth rate for 2015 and 2000 = ((18219/10252)^(1/15)-1)*100 = 3.91%

RGDP growth rate for 2015 and 2000 = ((19085.68/8003.63)^(1/15)-1)*100 = 5.96%

The GDP grew at a lower rate during 2015 and 2000 when compared with growth rate of 1950 and 2000 which can be seen in the above table.