   Chapter 5, Problem 7QR

Chapter
Section
Textbook Problem

In the year 2017, the economy produces 100 loaves of bread that sell for $2 each. In the year 2018, the economy produces 200 loaves of bread that sell for$3 each. Calculate nominal GDP, real GDP, and the GDP deflator for each year. (Use 2017 as the base year.) By what percentage does each of these three statistics rise from one year to the next?

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 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 2017 was 100 units and $2 each. Thus, the Nominal GDP of 2017 can be calculated as follows: Nominal GDP2017=Quantity produced2017×per unit price2017=100×2=200 Thus, the Nominal GDP of 2017 is$200.

Similarly, the quantity produced and price in 2018 were 200 units and $3 each. Thus, the Nominal GDP can be calculated as follows: Nominal GDP2018=Quantity produced2018×per unit price2018=200×3=600 Thus, the Nominal GDP of 2018 is$600.

The Real GDP can be calculated by multiplying the quantity produced with the base year price level. Since the base year is 2017, the Nominal GDP of 2017 will be equal to the Real GDP of 2017. In the case of 2018, the real GDP can be calculated by multiplying the 2018 quantity with the 2017 price as follows:

Real GDP2018=Quantity produced2018×per unit price2017=200×2=400

Thus, the Real GDP of 2018 is \$400.

The GDP deflator is the implicit price deflator. It can be calculated by dividing the Nominal GDP with the Real GDP and multiplying the value with 100 as follows:

GDP Deflator2017=Nominal GDP2017Real GDP2017×100=200200×100=100

Thus, the GDP deflator in 2017 is 100. Similarly, the GDP deflator for 2018 can be calculated as follows:

GDP Deflator2018=Nominal GDP2018Real GDP2018×100=600400×100=150

Thus, the GDP deflator in 2018 is 150

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