Table 1 Real Price Price Number Nomin Price Number Nominal Real Number Nominal Real Value of Value of of Goods Value of Year 1 of Goods al Value Year Value Year of Goods Good Year 1 Value of 2 Year 2 Goods of 3 Goods Goods Goods Goods Year 3 Year 3 of Year 2 Year 3 Goods Year 2 Year 2 Year 1 $5.00 Quarts $4.00 $4.00 $ $ 3 5 3 of Ice Cream Bottles $3.00 $3.00 2 $ $ $4.00 $ 1 1 of Shamp 00 Jars of $2.00 $ $2.00 $ $3.00 3 2 $ Peanut Butter NA NA $ NA Nomin 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
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.
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
Year 1 - the output combination is - 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter.
Year 2, the output combination 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)].
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
To get a real picture of a nation's
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.
Nominal GDP in the second year was $30 [= (5 x $4) + (2 x $3) + (2 x $2)].
- 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?
Nominal GDP in the third year was $28 [= (3 x $5) + (1 x $4) + (3 x $3)].
Deflator = GDP in year 3 / GDP in year 1
= 28/21 = 1.33
Real GDP in year 3 = Nominal GDP/ deflator = 30/1.333 = $22.5
Question 1
Compute nominal GDP, real GDP, and GDP price index in the year 1 and year 2. Complete the table attached 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
Question 2
What would be the reason (s) of price changes in this a 3-good economy?
Question 3
How would you describe the difference between nominal GDP and real GDP
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