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Nominal GDP, Real GDP and Inflation

Consider an economy where only three products x,y, and z are produced and sold for the prices indicated below:

Product;(Base year price);(Current year price);(Current year production)
X; $1; $2; 200
Y; $4; $5; 50
Z; $5; $6; 100

A. What are the values of nominal GDP and real GDP in the current year?

B. Explain the difference between the two answers in a.

C. What is the major advantage of the real GDP measure? The disadvantage?

D. Construct a price index giving all products equal weight. What is the rate of inflation?

Solution Preview

A) The Nominal GDP is the total market value, measured in current prices, of all goods and services produced during one year, which is the product of Current year price and Current year production. So, NGDP= 2*200+5*50+6*100 = $1,250
The Real GDP is the total market value, measured in constant ...

Solution Summary

The solution explains the concepts of nominal GDP, Real GDP and inflation very well. The solution goes into a great amount of detail related to nominal and real GDP and uses the data provided to calculate those values. It then explains the differences in those two and discusses the advantaged of real GDP followed by its disadvantages. Detailed steps are provided for everything. The response is very well written and easy to understand as well. Overall, an excellent response.

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