Question

5. Real versus nominal GDP

Consider a simple economy that produces two goods: pens and erasers. The following table shows the prices and quantities of the goods over a three-year period.

Year	Pens		Erasers
	Price	Quantity	Price	Quantity
	(Dollars per pen)	(Number of pens)	(Dollars per eraser)	(Number of erasers)
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

From 2019 to 2020, nominal GDP_______, and real GDP _______.

The inflation rate in 2020 was_______ .

Why is real GDP a more accurate measure of an economy's production than nominal GDP?

a) Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not.

b) Real GDP includes the value of exports, but nominal GDP does not.

c)    Real GDP is not influenced by price changes, but nominal GDP is.

Answer 1