   Chapter 5, Problem 6PA

Chapter
Section
Textbook Problem

Consider an economy that produces only chocolate bars, in year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is$5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year.a. What is nominal GDP for each of these three years?b. What is real GDP for each of these years?c. What is the GDP deflator for each of these years?d. What is the percentage growth rate of real GDP from year 2 to year 3?e. What is the inflation rate as measured by the GDP deflator from year 2 to year 3?f. In this one-good economy, how might you have answered parts (d) and (e) without first answering parts (b) and (c)? Sub part (a): To determine Nominal GDP. 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 that 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 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 quantity produced and price in year 1 were 3 bars of chocolate and the price was$4. Thus, the Nominal GDP of year 1 can be calculated as follows:

Nominal GDPYear 1=Quantity producedYear 1×per unit priceYear 1=3×4=12

Thus, the Nominal GDP of year 1 is \$12

Sub part (b):

To determine

Real GDP.

Sub part (c):

To determine

GDP deflator.

Sub part (d):

To determine

Growth of Real GDP.

Sub part (e):

To determine

Growth rate of inflation.

Sub part (f):

To determine

Growth rate of Real GDP and inflation rate.

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