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Below are some data from the land of milk & honey?
Below are some data from the land of milk & honey.
Year Price of Quantity of Price of Quantity of
Milk Milk(quartz) Honey Honey(quartz)
2001 $1 100 $2 50
2002 1 200 2 100
2003 2 200 4 100
a) Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2001 as the base year.
b) Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2002 and 2003from the preceding year. For each year, identify the variable that does not change. Explain in words why your answer makes sense.
c) Did economic well-being rise more in 2002 or 2003? Explain.
a and b) nominal GDP would be the sum of PxQ for each year:
for 2001, that would be: (1x100) + (2x50) = $200
for 2002, (1x200) + (2x100) = $400 (prices stayed the same, but quantities doubled, so nominal GDP doubled)
for 2003, (2x200) + (4x100) = $800 (prices doubled, quantities the same, so nominal GDP doubled)
real GDP would use the same calculations, except it would be each year's quantity times the base year's prices:
for 2001, since that is base year, real GDP is the same as nominal GDP, $200
for 2002, it would be (1x200) + (2x100) = $400 (quantities doubled, so did real GDP)
for 2003, it would be (1x200) + (2x100) = $400 (quantities stayed the same, so did real GDP)
GDP deflator would be (nominal GDP / real GDP) x 100
For base year, that is always 100, so 2001 (base year) it would be (200/200) x 100 = 100
for 2002, that would be (400/400) x 100 = 100 (notice that no prices changed from 2001 to 2002 so the deflator would be the same for both)
for 2003, that would be (800/400) x 100 = 200; deflator doubled, which makes sense because each price doubled
c) Economic well being rises when real GDP rises, because economic well being is measured in terms of real output. That would be 2002.
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