Consider an economy that produces only chocolate bars. In...

Consider an economy that produces only chocolate bars. In year 1 , the quantity produced is 3 bars and the price is 4 dollar. In year 2 , the quantity produced is 4 bars and the price is 5 dollar. In year 3 , the quantity produced is 5 bars and the price is 6 dollar. 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)?

Consider an economy that produces only chocolate bars. In year 1 , the quantity produced is 3 bars and the price is 4 dollar. In year 2 , the quantity produced is 4 bars and the price is 5 dollar. In year 3 , the quantity produced is
5 bars and the price is 6 dollar. 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)?

Key Concepts

Gross Domestic Product (GDP)

GDP is the total monetary value of all final goods and services produced within an economy in a given period. It serves as a broad measure of overall economic activity and health.

Nominal GDP

Nominal GDP is calculated using the current prices at which goods and services are sold in the given year. This measurement does not adjust for changes in the price level, meaning it can be influenced by both changes in quantities produced and in the prices of goods and services.

Real GDP

Real GDP measures the value of economic output adjusted for changes in the price level or inflation. It is calculated using the prices of a designated base year, thereby providing a more accurate reflection of an economy's growth by isolating changes in production quantities.

Base Year

A base year is the reference year against which the values in other years are compared when calculating real GDP. In this year, the prices are set as a constant standard, which allows economists to measure changes in actual production rather than changes due to inflation.

GDP Deflator

The GDP deflator is a price index that reflects the level of prices for all domestically produced goods and services in an economy. It is computed by dividing nominal GDP by real GDP and then multiplying by 100, providing a measure of the overall inflation or deflation within the economy.

Growth Rate

The growth rate in the context of real GDP measures the percentage increase in the actual volume of production from one period to another. It provides insight into how much the economy is growing in real terms, independent of changes in the price level.

Inflation Rate

The inflation rate, when measured by the GDP deflator, is the percentage change in the deflator over time. It indicates how much the overall price level has increased and is used to distinguish between nominal changes in GDP and real changes in economic output.

Transcript

00:01 This example is asking us to essentially compare nominal gdp with real gdp and look at how the gdp deflator impacts growth rates and inflation rates.

00:11 Let's start with the nominal gdp and this is for an economy which only produces chocolate bars so it keeps it pretty simple for us.

00:17 We're using year one as the base year, which has a quantity of three and a price of $4.

00:22 And you can see in year two, we have quantity of four and a price of five and year three a quantity of five and a price of six.

00:28 So let's start by calculating the nominal gdp for each one of these years.

00:32 You can see written in blue is the formula for each one of these parts.

00:36 So for the nominal gdp, we're going to take the price in the current year times the quantity in the current year.

00:41 So that makes it pretty easy.

00:42 So for the first year, we have three times four, which gives us a nominal gdp equal to $12.

00:50 Second year, we're going to take our quantity of four, multiply that by the price of $5, which gives us a nominal gdp of $20.

00:58 And for year three, we have a quantity of five multiplied by a price of six, giving us a nominal gdp of $30.

01:06 Now let's go ahead and calculate the real gdps, which is basically just comparing this to the price during the base year so that we're able to adjust for any inflation.

01:15 So for the first year here, because the first year is our base year, that real gdp is just going to be whatever its nominal gdp was because it's compared to itself.

01:24 For that second year, we're going to take that price in the base year, which we see is $4.

01:29 And that gets multiplied by the quantity during year two, which is four, giving us a real gdp of $16.

01:36 And for year three, again, we're using that base year price of $4, multiplied by the quantity of $5.

01:42 And that gives us a real gdp of $20...

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