Assignment 2
Suppose an extremely simple economy produces only two goods, pillows and rugs. In the
first year, 50 pillows are produced and sold at % EUR each; 11 rugs are produced and sold at
50 EUR each. In the second year, 56 pillows are produced and sold for 5 EUR each, and 12
rugs are produced and sold at 60EUR each.
a.
What is nominal GDP in each of the two years?
Price this year
Quantity this
(EUR)
year
Year 1
5
50
Pillows
50
11
Rugs
Nominal GDP
(EUR)
250
550
800
Year 2
Pillows
Rugs
5
60
56
12
280
720
1000
b.
What is the growth rate of nominal GDP?
Growth rate of GDP =
GDP2015 - GDP2014
* 100
GDP2014
Growth rate of nominal GDP = [(€1000 - €800) / €800] * 100 = 25%
c.
What is real GDP in each year, expressed in terms of constant Year 1 euros?
Price this year
Quantity this
Real GDP (EUR)
(EUR)
year
Year 1
5
50
250
Pillows
50
11
550
Rugs
800
Year 2
Pillows
Rugs
5
50
56
12
280
600
880
d.
What is the growth rate of real GDP (n constant Year 1 euros)?
Growth rate of nominal GDP = [(€880 - €800) / €800] * 100 = 10%