KA: Real vs. nominal GDP

The country of Neverland produces two goods: puppy shampoo and butter sculptures. The table below shows the output and prices of the two goods over three years: What is Neverland's real gross domestic product (GDP) in Year 2, assuming Year 1 is the base year?

$180 **Real GDP is calculated by multiplying the quantity of output in one year by the prices in a base year. Real GDP for year 2 is the quantities of the two goods from year 2 multiplied by the prices in year 1: Real GDP​=(10×$3)+(30×$5)=$180​

The country of Neverland produces two goods: puppy shampoo and butter sculptures. The table below shows the output and prices of the two goods over three years: Neverland calculates real GDP each year using constant prices, and year 2 is the base year. What is the value of real GDP in year 3, using year 2's prices?

$210 **This is the value of real GDP in year 3, using year two prices to calculate it:

The table below shows nominal GDP (in billions of dollars) and the GDP deflator for the country of Chucknorristan over several decades. What was real GDP in Chucknorristan in 1980?

$40 billion **To calculate real GDP using a GDP deflator, first divide the deflator by 100, and then divide nominal GDP by that value:

In 2017 Spamland's real GDP was $50 billion and the GDP deflator was 120. What was Spamland's nominal GDP in 2017?

$60 billion **Real GDP is the nominal GDP divided by the GDP deflator (in hundredths). You can rearrange this to get nominal GDP as a function of real GDP: Nominal GDP=Real GDP(deflator/100) Nominal GDP 2017=$50 billion(120/100) = $60 billion

The nation of Cuddlevia manufactures just two goods: short-sleeved snuggies and body pillows. What is the GDP deflator price index for 2017 using 2016 as a base year?

125 **The formula for the GDP deflator is: nominal Gdp/real GDP (100) 2017's nominal GDP: (50 X $10)+(25 X $20)= $1,000 2017's real GDP: (50 X $8)+(25 X$ 16)= $800 GDP Deflator= nominal GDP 2017/ Real GDP 2017 =1000/800(100) =1.25(100) =125

Key macroeconomic data for Hamsterville is given in the table below What is Hamsterville's GDP deflator for 2019?

300 **To calculate the GDP deflator, divide nominal GDP by real GDP, then multiply by 100: GDP deflator= nominal GDP/real GDP(100) = 60/20(100) =3(100) = 300

The Center for Economic Research in Frankland has compiled the macroeconomic data in the table below: Calculate the GDP deflator in 2018 and the CPI in 2018.

GDP deflator CPI​=125=150​ **CPI for 2018 = cost of basket in 2018/cost of basket in base year(100) = $1,200/$800(100)= 150

Suppose the amount of output doesn't change in an economy, but the consumer price index (CPI) increases. What happens to nominal gross domestic product (GDP) and real GDP?

Nominal GDP increases; real GDP doesn't change. **Nominal GDP is a measure of how much is spent on output. An increase in the CPI indicates that inflation has occurred— because prices have gone up, we know output must have cost more, and therefore nominal GDP has increased. An increase in inflation means that the prices used to calculate GDP have changed. However, the actual output hasn't changed. Since real GDP is a measure of how much is produced, real GDP doesn't change either.

Which of the following best describes the distinction between real GDP and nominal GDP?

Nominal GDP uses current prices; real GDP uses constant prices **Nominal GDP will increase when prices increase, even if output doesn't change at all. Using constant prices allows GDP to reflect actual changes in production instead of changes in prices.

The nation of Asilia spent $200 on goods and services in 2010. In 2011 the country spent $220 million on goods and services, even though output decreased compared to 2010. What happened to real GDP and nominal GDP between these two years?

Real GDP decreased; nominal GDP increased **Real GDP has decreased because less is being produced. Nominal GDP has increased because more was spent on these goods and services.

Production and prices in the nation of Justinia in 2016 and 2017 are shown in the table above. Which of the following best describes what happened to real GDP and nominal GDP between 2016 and 2017?

Real GDP has not changed; nominal GDP increased **Justinia is producing the same amount of all goods in both years. This means that real GDP stays the same. At the same time, the prices of these goods have increased so nominal GDP is increasing.

The table below shows the nominal GDP and the real GDP for the country of Hamsterville over three years. Which of the following can be concluded from the data above?

The economy experienced inflation between years 2 and 3 **Nominal GDP increased between years 2 and 3, while real GDP decreased. This is only possible if prices increased while actual output decreased.

Justinia is a country that produces three goods: guitars, physics books, and sandals. Which of the following would definitely cause an increase in nominal GDP but not a change real GDP in Justinia?

The quantity of goods produced stays the same; prices increase **Real GDP measures how much is actually produced, which has not changed according to this statement. Nominal GDP is a measure of how much is spent on output, which according to this statement would have increased.

What is one potential problem that may result from calculating real GDP using constant prices of products in a base year?

When the prices of some goods fall over time, calculating their value in constant prices makes these goods seem like a larger share of GDP than they really are **When goods like desktop computers and cell phones get cheaper due to decreasing costs, they should make up a smaller proportion of total GDP than when they cost much more in the past. Therefore, calculating GDP using prices from past years can overstate the actual amount of output when certain goods tend to get cheaper over time.