Question

Asked Nov 19, 2019

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Suppose that annual output in year 1 in a 3-good economy is 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter. In year 2, the output mix changes to 5 quarts of ice cream, 2 bottles of shampoo, and 2 jars of peanut butter.

1.1. If the prices in both years are $4 per quart for ice cream, $3 per bottle of shampoo, and $2 per jar of peanut butter, what was the economy’s nominal GDP in year 1? Show the calculation.

*Recall that GDP is the core measure of an economy's health. Nominal GDP (also known as current–dollar economic statistics) is not adjusted to account for any price changes. To calculate nominal GDP (the value of all final goods and services evaluated at current-year prices) you have to use the formula: Nominal GDP= P*Q. *

*To get a real picture of a nation's economic growth economists prefer using real GDP. To calculate real GDP (the value of all final goods and services evaluated at base-year prices for each year) you have to use the formula: Real GDP= P*Q. *

*In this case, you have to follow a several steps. The first step is to find the value of each good consumed. The second step is to add up the nominal value for the goods for each year separately. *

1.2. What was its nominal GDP in year 2? Show the calculation.

- Now, assume that in year 3, the output mix changes again to 3 quarts of ice cream, 1 bottles of shampoo, and 3 jars of peanut butter. Consider the year 1 as the base year.

2.1. If the prices in year 3 are $5 per quart for ice cream, $4 per bottle of shampoo, and $3 per jar of peanut butter, what is the economy’s real GDP in year3?

2.2. Compute nominal GDP, real GDP, and GDP price index in the year 1 and year 2. Complete the table below and show the calculation.

*Note that the base year is the year where the index is 100. To calculate GDP price index, you have to divide the price of a collection of goods and services in the specific year (year 2 or year 3) by the price for the same goods and services in a base year (year 1) multiplied by 100. Nominal GDP is then divided by the price index (in hundredths) to determine real GDP.*

Step 1

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Step 2

Given:

In year 1 - the output mix is - 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter.

In year 2, the output mix changes to 5 quarts of ice cream, 2 bottles of shampoo, and 2 jars of peanut butter.

The prices in both years are $4 per quart for ice cream, $3 per bottle of shampoo, and $2 per jar of peanut butter

**Therefore, GDP in year 1 was $21 [= (3 x $4) + (1 x $3) + (3 x $2)].**

Step 3

**Nominal GDP in the second year was $30 [= (5 x $...**

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