Chapter 2, Problem 6NP

(a)

To determine

The difference between the nominal gross domestic product of the two years; the base year and the current year.

Explanation of Solution

Each of the items in the quantity column of the table should be multiplied by the respective item in the price column to determine the nominal GDP value. The nominal GDP value of the current year is $200,000.

  $\begin{array}{c}\underset{\_}{NominalGDPinthecurrentyear}\\ \begin{array}{cccc}Fruit& Quantity& Price& TotalValue\\ Apples& 4000& 3& 12000\\ Bananas& 14000& 2& 28000\\ Oranges& 32000& 5& 160000\end{array}\end{array}$

In calculating the nominal GDP for the base year, the quantity column must be multiplied by the price column which includes the price levels of the base year. The nominal GDP value of the base year is $56,000.

  $\begin{array}{c}\underset{\_}{NominalGDPinthebaseyear}\\ \begin{array}{cccc}Fruit& Quantity& Price& TotalValue\\ Apples& 3000& 2& 6000\\ Bananas& 6000& 3& 18000\\ Oranges& 8000& 4& 32000\end{array}\end{array}$

  $\begin{array}{c}Percentageincreasesincethebaseyear=\frac{CurrentyearGDP-BaseyearGDP}{BaseyearGDP}\times 100\\ =\frac{200,000-56,000}{56,000}\times 100\\ =\underset{\_}{\underset{\_}{257.14\%}}\end{array}$

Since the base year, the nominal GDP has risen by 257.14%.

(b)

To determine

The difference between the real gross domestic product of the two years; the base year and the current year.

Explanation of Solution

In calculating the real GDP for the base year, the quantities of the three types of fruits must be multiplied by their respective price levels. These price levels are the base year price levels. In doing so, one could arrive at a GDP figure of $56000.

  $\begin{array}{c}\underset{\_}{RealGDPinthebaseyear}\\ \begin{array}{cccc}Fruit& Quantity& Price& TotalValue\\ Apples& 3000& 2& 6000\\ Bananas& 6000& 3& 18000\\ Oranges& 8000& 4& 32000\end{array}\end{array}$

To derive the real GDP for the current year, the current year quantities of various kinds of fruits must be multiplied by their respective base year prices. In this relation, the real GDP for the current year is $178000.

  $\begin{array}{c}\underset{\_}{RealGDPinthecurrentyear}\\ \begin{array}{cccc}Fruit& Quantity& Price& TotalValue\\ Apples& 4000& 2& 8000\\ Bananas& 14000& 3& 42000\\ Oranges& 32000& 4& 128000\end{array}\end{array}$

  $\begin{array}{c}Percentageincreasesincethebaseyear=\frac{CurrentyearGDP-BaseyearGDP}{BaseyearGDP}\times 100\\ =\frac{178,000-56,000}{56,000}\times 100\\ =\underset{\_}{\underset{\_}{217.86\%}}\end{array}$

Since the base year, the real GDP has risen by 217.86%.

(c)

To determine

The percentage change in the price level from the base year to the current year in light of the GDP deflators for the two time periods.

Explanation of Solution

The gross domestic product of a country is the total value of all final goods produced in monetary terms, within a given period of time (normally a year).

The deflator of the gross domestic product is the measure that indicates the changes in price levels of an economy with regard to a base year.

In other words, it is the percentage by which the price levels of an economy has changed over a given period of time.

The GDP deflator for the current year is being calculated by dividing the current year’s nominal GDP by the current year’s real GDP and multiplying the answer by 100. It is hence 112.36% in this case.

  $\begin{array}{c}GDPDeflatorforthecurrentyear=\frac{CurrentnominalGDP}{CurrentrealGDP}\times 100\\ =\frac{200000}{178000}\times 100\\ =\underset{\_}{\underset{\_}{112.36\%}}\end{array}$

The GDP deflator for the base year is being calculated by dividing the base year’s nominal GDP by the base year’s real GDP and multiplying the answer by 100. It is hence 100% in this relation.

  $\begin{array}{c}GDPDeflatorforthebaseyear=\frac{BasenominalGDP}{BaserealGDP}\times 100\\ =\frac{56000}{56000}\times 100\\ =\underset{\_}{\underset{\_}{100\%}}\end{array}$

  $\begin{array}{c}Percentagechangefrombase\text{}tocurrentyear=\left(\begin{array}{l}GDPdeflatorofcurrentyear-\\ GDPdeflatorofbaseyear\end{array}\right)\\ =112.36-100\\ =\underset{\_}{\underset{\_}{12.36\%}}\end{array}$

One could identify a 12.36% change in the GDP deflator from the base year to the current year.

(d)

To determine

The reason why the nominal gross domestic product of the economy has changed over time.

Explanation of Solution

The nominal gross domestic product of an economy is calculated by multiplying the quantities of various products by their current price levels.

The difference between the nominal GDP of a base year and the current year is influenced by both the quantity changes as well as the price changes.

However, one could argue that the changes in quantity or the output level contribute more to this change than the price levels.