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An economy produces three goods: cars, computers, and oranges
An economy produces three goods: cars, computers, and oranges. Quantities and prices per unit for year 2007 and 2008 are as follows:
| 2007 | 2008 | |||
| Quantity | Price | Quantity | Price | |
| Cars | 25 | $2000 | 20 | $3000 |
| Computers | 10 | $500 | 20 | $250 |
| Oranges | 2000 | $1 | 2000 | $1 |
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How much is the nominal GDP in 2007 and 2008? How much does the nominal GDP change from 2007 to 2008 in percentage?
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Choose 2007 as the base year, how much is the real GDP in 2007 and in 2008? How much does real GDP change from 2007 to 2008 in percentage?
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Suppose we still use 2007 price as the common price to compute real GDP in 2007 and in 2008. Compute the GDP deflator for both years and the inflation rate in 2008.
Expert Solution
Nominal GDP:
Nominal GDP in 2007 = Price of car in 2007 * Quantity of car in 2007 + Price of computers in 2007 * Quantity of computers in 2007 + Price of oranges in 2007 * Quantity of oranges in 2007 = 2,000 * 25 + 500 * 10 + 1 * 2,000 = 57,000
Nominal GDP in 2008 = Price of car in 2008 * Quantity of car in 2008 + Price of computers in 2008 * Quantity of computers in 2008 + Price of oranges in 2008 * Quantity of oranges in 2008 = 3,000 * 20 + 250 * 20 + 1 * 2,000 = 67,000
Nominal GDP change by = [(67,000 - 57,000) / 57,000] * 100 = 17.54%
Real GDP:
Real GDP in 2007 = Nominal GDP in 2007 = Price of car in 2007 * Quantity of car in 2007 + Price of computers in 2007 * Quantity of computers in 2007 + Price of oranges in 2007 * Quantity of oranges in 2007 = 2,000 * 25 + 500 * 10 + 1 * 2,000 = 57,000
Real GDP in 2008 = Price of car in 2007 * Quantity of car in 2008 + Price of computers in 2007 * Quantity of computers in 2008 + Price of oranges in 2007 * Quantity of oranges in 2008 = 2,000 * 20 + 500 * 20 + 1 * 2,000 = 52,000
Real GDP change by = [(52,000 - 57,000) / 57,000] * 100 = -8.77%
GDP deflator:
GDP deflator in 2007 = Nominal GDP in 2007 / Real GDP in 2007 = 57,000 / 57,000 = 1
GDP deflator in 2008 = Nominal GDP in 2008 / Real GDP in 2008 = 67,000 / 52,000 = 1.29
GDP deflator changes by = [(1.29 - 1) / 1] * 100 = 29%
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