CLASSROOM PRACTICE
• An economy produces only pizza and soda. The table
gives the quantities produced and prices in 2003 and
2004. The base year is 2003.
YEAR 2003
ITEMS
YEAR 2004
QUANTITY PRICE ($) QUANTITY PRICE ($)
PIZZA
100
10.00
150
20
SODA
50
2.00
75
4
CLASSROOM PRACTICE
1. What is the nominal GDP for year 2003 & 2004?
2. What is the real GDP for year 2003 & 2004?
3. If you want to measure the change in production, is it
better to use nominal GDP or real GDP? Why?
YEAR 2003
YEAR 2004
ITEMS
QUANTITY
PRICE ($)
QUANTITY
PRICE ($)
PIZZA
100
10.00
150
20
SODA
50
2.00
75
4
ANSWER:
Question 1:
Nominal GDP for year:
2003 = $1,100 (100 x $10) + (50 x $2)
2004 = $3,300 (150 x $20) + (75 x $4)
ANSWER:
Question 2:
Real GDP for the year :
2003 = $1,100 (100 x $10) + (50 x $2)
2004 = $1,650 (150 x $10) + (75 x $2)
ANSWER:
 Question 3:
 Nominal GDP changes whenever production or prices
change.
 Real GDP uses constant prices and changes only when
production changes. Therefore it is better to use RGDP
to measure actual changes in production.
NGDP 2006
FISH = (400 x $7) = $2800
CHICKEN = (225 x $8) = $1800
BEEF = (175 x $10) = $1750
NGDP 2006 = $2800 + $1800 +$1750
NGDP 2006 = $6350
NGDP 2007
FISH = (550 x $8) = $4400
CHICKEN = (250 x $7) = $1750
BEEF = (275 x $12) = $3300
NGDP 2007 = $4400 + $1750 +$3300
NGDP 2007 = $9450
NGDP 2008
FISH = (900 x $9) = $8100
CHICKEN = (275 x $6) = $1650
BEEF = (275 x $15) = $4125
NGDP 2008 = $8100 + $1650 +$4125
NGDP 2008 = $13875
RGDP 2006
FISH = (400 x $7) = $2800
CHICKEN = (225 x $8) = $1800
BEEF = (175 x $10) = $1750
RGDP 2006 = $2800 + $1800 +$1750
RGDP 2006 = $6350
RGDP 2007
FISH = (550 x $7) = $3850
CHICKEN = (250 x $8) = $2000
BEEF = (275 x $10) = $2750
RGDP 2007 = $3850 + $2000 +$2750
RGDP 2007 = $8600
RGDP 2008
FISH = (900 x $7) = $6300
CHICKEN = (275 x $8) = $2200
BEEF = (275 x $10) = $2750
RGDP 2008 = $6300 + $2200 +$2750
RGDP 2008 = $11250
GDP DEFLATOR 2006
(NOMINAL GDP2006 / RGDP 2006) x 100
($6350/$6350) x 100
= 100
GDP DEFLATOR 2007
(NOMINAL GDP2007 / RGDP 2007) x 100
($9450/$8600) x 100
= 109.88
GDP DEFLATOR 2008
(NOMINAL GDP2008 / RGDP 2008) x 100
($13875/$11250) x 100
= 123.33
INFLATION RATE BETWEEN YEAR 2007 AND 2008
(GDPDEF2008 – GDPDEF2007)
GDPDEF2007
X 100
(123.33 – 109.88)
109.88
X 100
= 12.24%
DIFFERENCE BETWEEN NGDP & RGDP
 Nominal Gross Domestic Product is the value of all final
goods and services measured at the current year’s prices.
It is used to compare changes in output from one quarter to
another quarter in the same year.
 Real Gross Domestic Product is the
value of all final goods and services measured
using a set of constant prices, often using a base year price. It
is used to compare the actual economic growth from one year
to another year.
QUESTION 3
The following statistics are extracted from Country XYZ’s national income accounts.
Year
2007
2008
Nominal GDP ($b)
Price Index
6000
120
6875
125
a) Calculate the value of real GDP for 2007 and 2008.
GDP def = [Nominal GDP/ Real GDP] X 100
Year 2007
120 = 6000/(?)] X 100
Real GDP = [6000/120] x 100
Real GDP = 5000
Year 2008
125 = 6875/(?)] X 100
Real GDP = [6875/125] x 100
Real GDP = 5500
QUESTION 3 - SOLUTIONS
The following statistics are extracted from Country XYZ’s national income accounts.
Year
2007
2008
Nominal GDP ($b)
Price Index
6000
120
6875
125
b) Calculate the economic growth rate for 2008.
Growth rate = [(RGDP py – RGDP cy) / RGDP cy] x 100
Growth rate = [(5500 – 50000)/ 5000] x 100
Growth rate = 10%
QUESTION 3 - SOLUTIONS
The following statistics are extracted from Country XYZ’s national income
accounts.
Year
2007
2008
Nominal GDP ($b)
6000
6875
Price Index
120
125
c) What was the inflation rate for 2008?
Inf rate = [(GDPdef py – GDPdefcy)/ GDP defcy] x 100
Inf rate = [(125-120)/120] x 100
Inf rate = 4.17%
QUESTION 4
An economy produces two goods: hot dogs and burgers. The
reference year is after 2014.
In 2014, 15 hot dogs are produced at a price of $2 each, and
20 burgers at a price of $7 each.
In 2015, 20 hot dogs are produced at a price of $4 each, and
30 burgers at a price of $8 each.
a) Calculate NGDP, RGDP, GDP deflator for each year.
b) Calculate the inflation rate.
QUESTION 4- SOLUTIONS (NGDP)
An economy produces two goods: hot dogs and burgers. The reference year is after 2014.
In 2014, 15 hot dogs are produced at a price of $2 each, and 20 burgers at a price of $7
each.
In 2015, 20 hot dogs are produced at a price of $4 each, and 30 burgers at a price of $8
each.
Answer:
NGDP 2014 = P2014 x QTY 2014
NGDP 2014 = ($2 x 15) + ($7 x 20)
NGDP 2014 = $30 + $140
NGDP 2014 = $170
NGDP 2015 = P2015 x QTY 2015
NGDP 2015 = ($4 x 20) + ($8 x 30)
NGDP 2015 = $80 + $240
NGDP 2015 = $320
QUESTION 4- SOLUTIONS (RGDP)
An economy produces two goods: hot dogs and burgers. The reference year is after 2014.
In 2014, 15 hot dogs are produced at a price of $2 each, and 20 burgers at a price of $7
each.
In 2015, 20 hot dogs are produced at a price of $4 each, and 30 burgers at a price of $8
each.
Answer:
RGDP 2014 = P2015 x QTY 2014
RGDP 2014 = ($4 x 15) + ($8 x 20)
RGDP 2014 = $60 + $160
RGDP 2014 = $220
RGDP 2015 = P2015 x QTY 2015
RGDP 2015 = ($4 x 20) + ($8 x 30)
RGDP 2015 = $80 + $240
RGDP 2015 = $320
QUESTION 4- SOLUTIONS (GDP deflator)
An economy produces two goods: hot dogs and burgers. The reference year is after 2014.
In 2014, 15 hot dogs are produced at a price of $2 each, and 20 burgers at a price of $7
each.
In 2015, 20 hot dogs are produced at a price of $4 each, and 30 burgers at a price of $8
each.
Answer:
GDP def 2014 = [NGDP 2014/RGDP2014] X 100
GDP def 2015 = [NGDP 2015/RGDP2015] X 100
GDP def 2014 = [$170/$220] x 100
GDP def 2015 = [$320/$320] x 100
GDP def 2014 = 72.72
GDP def 2015 = 100
QUESTION 4 – INFLATION RATE
b) Calculate the inflation rate.
Inf. Rate = [(GDP def 2015 – GDP def 2014) / GDP def 2014) x 100
Inf. Rate = [(100 – 72.72)/72.72] x 100
Inf. Rate = 37.51%