   Chapter 5, Problem 2PA

Chapter
Section
Textbook Problem

Fill in the blanks: To determine

The nominal and real GDP and GDP deflator.

Explanation

The GDP is the summation of the money value of all the goods and services produced within the political boundary of a country, within a financial year. There are two different ways of calculating the GDP of the economy and they are the real GDP and the nominal GDP. The real GDP is the GDP calculated at the constant prices.

There will be a base price index and the value of goods and services will be calculated on the base of the constant prices. Thus, it will measure the GDP of the economy on the same base year price index, which will help us to identify the inflation in the economy. The nominal GDP is the GDP calculated at the current prices. The GDP will be calculated by multiplying the quantity of goods and services produced with the current year with market prices, which will include the inflation impact. The nominal GDP of the economy can be calculated by multiplying the quantity produced by the per-unit price of the commodity. The GDP deflator can be calculated by dividing the nominal GDP by the real GDP and multiplying the result with 100. The equation is as follows:

GDP deflator=Nominal GDPReal GDP×100

Using the equation, the GDP deflator for 1970 can be calculated as follows:

GDP deflator1970=1,2003,000×100=40

So, the GDP deflator for 1970 is 40. Similarly, using the equation, the GDP deflator for year 2000 and 2030 can be calculated by substituting the respective values in the equation

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