Table 1PriceNumberNominRealPriceNumberNominalRealPriceNumberNominalRealValue ofYearValue ofYear 1of GoodsalValueof GoodsValueYearofValue ofGoodYear 1Valueof2Year 2Goodsof3GoodsGoodsGoodsofGoodsYear 2GoodsYear 3Year 3Year 3GoodsYear 2Year 2Year 1Quarts$4.00$$$4.00$$5.00$of IceCream$3.00$3.00$4.00Bottles121ofShamp00Jars of$2.00$$$2.00$3.00$32$PeanutButter$$$NominNANANANANANANANANAal GDPRealNA$NANANANANANANANAGDPGDP100NANANANANANANANANAPriceIndex

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.

 

  1. 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.

Table 1
Price
Number
Nomin
Real
Price
Number
Nominal
Real
Price
Number
Nominal
Real
Value of
Year
Value of
Year 1
of Goods
al
Value
of Goods
Value
Year
of
Value of
Good
Year 1
Value
of
2
Year 2
Goods
of
3
Goods
Goods
Goods
of
Goods
Year 2
Goods
Year 3
Year 3
Year 3
Goods
Year 2
Year 2
Year 1
Quarts
$4.00
$
$
$4.00
$
$5.00
$
of Ice
Cream
$3.00
$3.00
$4.00
Bottles
1
2
1
of
Shamp
00
Jars of
$2.00
$
$
$2.00
$3.00
$
3
2
$
Peanut
Butter
$
$
$
Nomin
NA
NA
NA
NA
NA
NA
NA
NA
NA
al GDP
Real
NA
$
NA
NA
NA
NA
NA
NA
NA
NA
GDP
GDP
100
NA
NA
NA
NA
NA
NA
NA
NA
NA
Price
Index
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Table 1 Price Number Nomin Real Price Number Nominal Real Price Number Nominal Real Value of Year Value of Year 1 of Goods al Value of Goods Value Year of Value of Good Year 1 Value of 2 Year 2 Goods of 3 Goods Goods Goods of Goods Year 2 Goods Year 3 Year 3 Year 3 Goods Year 2 Year 2 Year 1 Quarts $4.00 $ $ $4.00 $ $5.00 $ of Ice Cream $3.00 $3.00 $4.00 Bottles 1 2 1 of Shamp 00 Jars of $2.00 $ $ $2.00 $3.00 $ 3 2 $ Peanut Butter $ $ $ Nomin NA NA NA NA NA NA NA NA NA al GDP Real NA $ NA NA NA NA NA NA NA NA GDP GDP 100 NA NA NA NA NA NA NA NA NA Price Index

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Expert Answer

Step 1

Hey, Thank you for the question. According to our policy we can only answer 3 subparts per question. If you need further help, post the question again and mention the subpart you want us to solve

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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