Consider the following data on the U.S. economy: Nominal GDP GDP Deflator Year

Consider the following data on the U.S. economy: ...

Consider the following data on the U.S. economy: $$\begin{array}{lr} & \text { Nominal GDP } & \text { GDP Deflator } \\ \text { Year } & \text { (in billions of dollars) } & \text { (base year } 2012 \text { ) } \\ \hline 2018 & 20,501 & 110.4 \\ 1998 & 9,063 & 75.3 \end{array}$$ a. What was the growth rate of nominal GDP between 1998 and $2018 ?$ (Hint: The growth rate of a variable $X$ over an $N$ -year period is calculated as $100 \times\left[\left(X_{\text {final }} / X_{\text {initial }}\right)^{1 / N}-1\right] .$ ) b. What was the growth rate of the GDP deflator between 1998 and 2018 ? c. What was real GDP in 1998 measured in 2012 prices? d. What was real GDP in 2018 measured in 2012 prices? e. What was the growth rate of real GDP between 1998 and 2018 ? f. Was the growth rate of nominal GDP higher or lower than the growth rate of real GDP? Explain.

Consider the following data on the U.S. economy:
$$\begin{array}{lr}
& \text { Nominal GDP } & \text { GDP Deflator } \\
\text { Year } & \text { (in billions of dollars) } & \text { (base year } 2012 \text { ) } \\
\hline 2018 & 20,501 & 110.4 \\
1998 & 9,063 & 75.3
\end{array}$$
a. What was the growth rate of nominal GDP between 1998 and $2018 ?$ (Hint: The growth rate of a variable $X$ over an $N$ -year period is calculated as $100 \times\left[\left(X_{\text {final }} / X_{\text {initial }}\right)^{1 / N}-1\right] .$ )
b. What was the growth rate of the GDP deflator between 1998 and 2018 ?
c. What was real GDP in 1998 measured in 2012 prices?
d. What was real GDP in 2018 measured in 2012 prices?
e. What was the growth rate of real GDP between 1998 and 2018 ?
f. Was the growth rate of nominal GDP higher or lower than the growth rate of real GDP? Explain.

Key Concepts

Nominal GDP

Nominal GDP represents the total market value of all final goods and services produced in an economy during a specific period, measured using current prices. This concept is important in understanding how the economy grows in terms of current monetary values, though it does not adjust for changes in the price level over time.

Real GDP

Real GDP measures the value of all final goods and services produced in an economy adjusted for changes in the price level, thereby reflecting the true volume of production. By using constant base-year prices, real GDP provides a more accurate picture of an economy's growth in terms of output size without the distortion of inflation.

GDP Deflator

The GDP deflator is a broad measure of price inflation within the economy, calculated as the ratio of nominal GDP to real GDP multiplied by 100. It reflects how much a change in the base year’s level of prices would affect the value of the economy’s output and is crucial for converting nominal GDP into real GDP.

Growth Rate Calculation

The growth rate calculation, specifically the compound annual growth rate (CAGR), is a method used to determine the annual rate of return over a period of time. It is used in macroeconomics to measure the rate at which economic variables such as GDP (nominal or real) grow, by taking into account compounding effects over multiple periods.

Base Year and Price Index

The base year serves as the standard point of reference for comparing changes in economic data over time. In the context of the GDP deflator and real GDP calculations, the base year is used to establish constant prices, allowing for meaningful comparisons across different periods by removing the effects of inflation.

Transcript

00:01 So for this question, we're giving a data on the us economy with the year, the nominal gdp and the gdp deflator.

00:11 So the year is 2018 and 1998.

00:21 We're also giving the nominal gdp and the gdp deflator.

00:45 And this is 110 .4 and 75 .3.

00:55 So the first question now says, what was the growth rate of the nominal gdp between 1998 and 2008? and the growth rate of variable x over an end year period is, it gives us a formula for that.

01:13 So we need to know that the nominal gross domestic product, which is njdp, is some of the values of all the goods and services produced in the country using the current year price.

01:25 In the time period.

01:28 So to calculate the growth rates of the nominal gdp from year 1998 to 2008 would be growth rates would be to 20 ,501 divided by the one for 1998 9 ,063, they raised to power 1 over 20 because there's 20 years in between them then minus 1 multiplied by 100 over 1 so this is going to give you 2 .26 raised the power 1 over 20 minus 1 multiplied by 100 and this is equal to 1 .047 minus 1 multiplied by 100 and this is equal to 4 .17 percent so the growth rate from 1998 to 2018 is 4 .717%.

02:37 Now moving on to the next question.

02:41 What was the growth rate of the gdp deflator between both years? so for that, the growth rate of the gdp deflator will basically be us using the gdp deflator we are giving.

03:03 So that would be equal to 110 .4 divided by divided by 75 .3 which is the older year waste of power 1 over 20 difference in years minus 1 then multiplied by 100 so this is equal to 1 .466 raised to power 1 about 20 minus 1 multiplied by 100 and this is equal to 1 .01 93 minus 1 multiplied by 100 and therefore the growth rate of the gdp deflator will be 1 .93%.

03:58 Now moving on to the next question.

04:04 What was the real gdp in 1998 measured in 2012 prices? now the red gdp in 1998 is the nominal gdp divided by the gdp inflator multiplied by 100 over 1 and that's equal to 20 ,501 divided by 110 .4 multiplied by 100.

04:43 And when you solve this out, it's going to give you $18 ,570.

04:51 So this is the real gdp in 1998.

04:56 And i'll move to the next question...

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