The country of Myrule has produced the following quantity of gauges and potatoes, with the price of each listed in dollar terms.
(a)Using Year 1 as the base year, what is the growth rate of real GDP from Year 1 to Year 2? (b)Based on the GDP deflator, what is the inflation rate from Year 1 to Year 2?
What will be an ideal response?
| (a) | Real GDP for Year 1 = Year 1 quantities at Year 1 prices = (8000 × $4) + (6000 × $8) = $80,000. |
Growth rate of real GDP = 0%
| (b) | Nominal GDP for Year 1 = Year 1 quantities at Year 1 prices = (8000 × $4) + (6000 × $8) = |
Nominal GDP for Year 2 = Year 2 quantities at Year 2 prices = (10,000 × $3) + (5000 × $14) = $100,000.
GDP deflator = nominal GDP/real GDP
GDP deflator in Year 1 = $80,000/$80,000 = 1.
GDP deflator in Year 2 = $100,000/$80,000 = 1.25.
Inflation rate = [(1.25/1) - 1] × 100% = 25%.
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