Chapter 23, Problem 4PA

Sub part (a):

To determine

The nominal and real GDP and GDP deflator.

Explanation of Solution

The GDP is the summation of the monetary 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 basis 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’s 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 2013 was 100 quarts of milk and 50 quarts of honey. The prices were $1 and $2 respectively, for each quart. Thus, the nominal GDP of 2013 can be calculated as follows:

$\begin{array}{c}{\text{Nominal GDP}}_{2013}=\left[\begin{array}{l}{\left({\text{Quantity produced}}_{2013}\times {\text{per unit price}}_{2013}\right)}_{\text{Milk}}\\ +{\left({\text{Quantity produced}}_{2013}\times {\text{per unit price}}_{2013}\right)}_{\text{Honey}}\end{array}\right]\\ =\left(100\times 1\right)+\left(50\times 2\right)\\ =100+100\\ =200\end{array}$

Thus, the nominal GDP of 2013 is $200.

Similarly, the quantity produced and price in 2014 was 200 quarts of milk and 100 quarts of honey. The prices were $1 and $2, respectively. Thus, the nominal GDP of 2014 can be calculated as follows:

$\begin{array}{c}{\text{Nominal GDP}}_{2014}=\left[\begin{array}{l}{\left({\text{Quantity produced}}_{2014}\times {\text{per unit price}}_{2014}\right)}_{\text{Milk}}\\ +{\left({\text{Quantity produced}}_{2014}\times {\text{per unit price}}_{2014}\right)}_{\text{Honey}}\end{array}\right]\\ =\left(200\times 1\right)+\left(100\times 2\right)\\ =200+200\\ =400\end{array}$

Thus, the nominal GDP of 2014 is $400.

Similarly, the quantity produced in 2015 was 200 quarts of milk and 100 quarts of honey but the prices increased to $2 and $4, respectively. Thus, the nominal GDP of 2015 can be calculated as follows:

$\begin{array}{c}{\text{Nominal GDP}}_{2015}=\left[\begin{array}{l}{\left({\text{Quantity produced}}_{2015}\times {\text{per unit price}}_{2015}\right)}_{\text{Milk}}\\ +{\left({\text{Quantity produced}}_{2015}\times {\text{per unit price}}_{2015}\right)}_{\text{Honey}}\end{array}\right]\\ =\left(200\times 2\right)+\left(100\times 4\right)\\ =400+400\\ =800\end{array}$

Thus, the nominal GDP of 2015 is $800.

The real GDP can be calculated by multiplying the quantity produced with the base year price level. Since the base year is 2013, the nominal GDP of 2013 will be equal to the real GDP of 2013, which is equal to $200.

In the case of 2014, the real GDP can be calculated by multiplying the 2014 quantity with the 2013 price as follows:

$\begin{array}{c}{\text{Real GDP}}_{2014}=\left[\begin{array}{l}{\left({\text{Quantity produced}}_{2014}\times {\text{per unit price}}_{2013}\right)}_{\text{Milk}}+\\ {\left({\text{Quantity produced}}_{2014}\times {\text{per unit price}}_{2013}\right)}_{\text{Honey}}\end{array}\right]\\ =\left(200\times 1\right)+\left(100\times 2\right)\\ =200+200\\ =400\end{array}$

Thus, the real GDP of 2014 is $400.

In the case of 2015, the real GDP can be calculated by multiplying the 2015 quantity with the 2013 price. Since there is no change in the quantity produced in 2015 and 2014 in the two commodities of milk and honey, there will be no change in the real GDP of the two years and thus, the real GDP of 2015 will be the same as 2014, which 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:

${\text{GDP Deflator}}_{2013}=\frac{{\text{Nominal GDP}}_{2013}}{{\text{Real GDP}}_{2013}}\times 100$

Thus, by substituting the values of nominal and real GDP in the equation, we can calculate the GDP deflator as follows:

$\begin{array}{c}{\text{GDP Deflator}}_{2013}=\frac{{\text{Nominal GDP}}_{2013}}{{\text{Real GDP}}_{2013}}\times 100\\ =\frac{200}{200}\times 100\\ =100\end{array}$

Thus, the GDP deflator in 2013 is 100. Similarly, the GDP deflator for 2014 can be calculated as follows:

$\begin{array}{c}{\text{GDP Deflator}}_{2014}=\frac{{\text{Nominal GDP}}_{2014}}{{\text{Real GDP}}_{2014}}\times 100\\ =\frac{400}{400}\times 100\\ =100\end{array}$

Thus, the GDP deflator in 2014 is also 100.

The GDP deflator for 2015 can be calculated as follows:

$\begin{array}{c}{\text{GDP Deflator}}_{2015}=\frac{{\text{Nominal GDP}}_{2015}}{{\text{Real GDP}}_{2015}}\times 100\\ =\frac{800}{400}\times 100\\ =200\end{array}$

Thus, the GDP deflator in 2015 is 200.

These values can be tabulated as follows:

Table 1

Year	Nominal GDP	Real GDP	GDP Deflator
2013	$200	$200	100
2014	$400	$400	100
2015	$800	$400	200

Economics Concept Introduction

Concept introduction:

Gross Domestic Product (GDP): It is the summation of the monetary value of all the goods and services produced within the political boundary of a country, within a financial year.

GDP deflator: It is an implicit price deflator.

Sub part (b):

To determine

The Percentage change in nominal and real GDP and GDP deflator.

Explanation of Solution

The percentage change in nominal GDP can be calculated by the following formula:

$\text{Percentage change in Nominal GDP}=\frac{\left({\text{Nominal GDP}}_{\text{n}}-{\text{Nominal GDP}}_{\text{n}-1}\right)}{{\text{Nominal GDP}}_{\text{n-1}}}\times 100$

Thus, by substituting the values for the current year and previous year, we can calculate the percentage change in the nominal GDP as follows:

$\begin{array}{c}{\text{Percentage change in Nominal GDP}}_{2014}=\frac{\left({\text{Nominal GDP}}_{2014}-{\text{Nominal GDP}}_{2013}\right)}{{\text{Nominal GDP}}_{2013}}\times 100\\ =\frac{\left(400-200\right)}{200}\times 100\\ =100\end{array}$

Thus, the percentage change in nominal GDP of 2014 is 100 percent.

$\begin{array}{c}{\text{Percentage change in Nominal GDP}}_{2015}=\frac{\left({\text{Nominal GDP}}_{2015}-{\text{Nominal GDP}}_{2014}\right)}{{\text{Nominal GDP}}_{2014}}\times 100\\ =\frac{\left(800-400\right)}{400}\times 100\\ =100\end{array}$

Thus, the percentage change in nominal GDP of 2015 is also 100 percent.

Similarly, the percentage change in real GDP and GDP deflator can be calculated as follows:

$\begin{array}{c}{\text{Percentage change in Real GDP}}_{2014}=\frac{\left({\text{Real GDP}}_{2014}-{\text{Real GDP}}_{2013}\right)}{{\text{Real GDP}}_{2013}}\times 100\\ =\frac{\left(400-200\right)}{200}\times 100\\ =100\end{array}$

The percentage change in real GDP of 2014 is 100 percent.

$\begin{array}{c}{\text{Percentage change in Real GDP}}_{2015}=\frac{\left({\text{Real GDP}}_{2015}-{\text{Real GDP}}_{2014}\right)}{{\text{Real GDP}}_{2014}}\times 100\\ =\frac{\left(400-400\right)}{400}\times 100\\ =0\end{array}$

The percentage change in real GDP of 2015 is 0 percent.

The percentage change in the GDP deflator can be calculated as follows:

$\begin{array}{c}{\text{Percentage change in GDP deflator}}_{2014}=\frac{\left({\text{GDP deflator}}_{2014}-{\text{GDP deflator}}_{2013}\right)}{{\text{GDP deflator}}_{2013}}\times 100\\ =\frac{\left(100-100\right)}{100}\times 100\\ =0\end{array}$

Thus, the percentage change in GDP deflator of 2014 is 0 percent.

$\begin{array}{c}{\text{Percentage change in GDP deflator}}_{2015}=\frac{\left({\text{GDP deflator}}_{2015}-{\text{GDP deflator}}_{2014}\right)}{{\text{GDP deflator}}_{2014}}\times 100\\ =\frac{\left(200-100\right)}{100}\times 100\\ =100\end{array}$

Thus, the percentage change in GDP deflator of 2015 is 100 percent.

The prices in the economy remain the same in the year 2013 and 2014, which leads to no change in the percentage change in the GDP deflator. This is why the GDP deflator percentage change is zero. Similarly, the output levels remain the same in the years 2014 and 2015, which leads to the value of percentage change in the real GDP to remain at zero.

Economics Concept Introduction

Concept introduction:

Gross Domestic Product (GDP): It is the summation of the monetary value of all the goods and services produced within the political boundary of a country, within a financial year.

GDP deflator: It is an implicit price deflator.

Sub part (c):

To determine

Economic well-being.

Explanation of Solution

The economic well-being increased much larger in the year of 2014, when compared to 2013 and 2015. This result is obtained from the analysis of the data that the real GDP remained the same in 2015 as the real GDP in the 2014. Thus, there were no changes in the real GDP after 2014. But after 2013, the real GDP increased from $200 to $400 in 2014. This means that the well-being rose more in 2014. Another reason why the well-being didn’t rise in 2015 was the price hike. The output remained the same, whereas prices doubled.

Economics Concept Introduction

Concept introduction:

Gross Domestic Product (GDP): It is the summation of the monetary value of all the goods and services produced within the political boundary of a country, within a financial year.