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Nominal vs. Real GDP

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Consumer Price Index (pound of corn)

Year Current Price Base Year Price Price Index

2006 $1.00 $1.00 100

2007 $1.25 A 125

2008 $1.34 $1.00 B

2009 C $1.00 146

Consider the price index above. What are the values for A, B, and C? Was there inflation from 2006 to 2009? If the price changes above occurred for all goods across the economy during the four year period, explain how nominal GDP and real GDP would differ.

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For A, I have $1.00
B, I have 134
C, I have $1.46

Inflation occurs when prices rise. GDP is the value of all final goods and services produced in an economy. If GDP is based on inflated prices it would appear that the economy is growing quickly, ...

Solution Summary

The solution quickly fills in a consumer price index table using current and base year prices, then explains the differences between nominal and real GDP based on price indices in 191 words.

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Nominal Versus Real GDP

Table: Nominal Versus Real GDP

Year Coffee (Cups) Milk (Gallons) GDP (nominal, real)
2002 (base year expenditure) Price $1.00
Quantity 10 Price $2.00
Quantity 20
2003 (Case 1 expenditure) Price $1.50
Quantity 10 Price $4.00
Quantity 20
2003 (Case 2 expenditure) Price $1.00
Quantity 15 Price $2.00
Quantity 40
2003 (Case 3 expenditure) Price $1.50
Quantity 15 Price $4.00
Quantity 40

Adding to the above Table, if real GDP in 1998 was $8,508.9 billion and nominal GDP in 1998 was $8,781.50 billion, calculate the percentage change from 1997 to 1998 in nominal GDP, real GDP, and the price level. What is the value of the GDP deflator in 1998?

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