Final answer:
The question addresses calculating Nominal GDP in a hypothetical economy producing smart TVs, with an increase in year two due to higher prices. This concept is explained with a micro-level business example and is related to economies of scale, which describe how larger production scales typically lower average costs.
Step-by-step explanation:
The question relates to the calculation and understanding of Nominal GDP, which stands for Gross Domestic Product measured at current market prices, without adjusting for inflation or deflation. In year one, if an economy produces and sells 10,000 smart TVs at $1,000 each, the Nominal GDP would be 10,000 TVs × $1,000, which equals $10,000,000. In year two, with the same number of TVs sold but at a higher price of $1,500 each, the Nominal GDP is 10,000 TVs × $1,500, resulting in $15,000,000. This increase in Nominal GDP does not necessarily indicate a real increase in economic output, but rather reflects the change in prices between the two years.
To understand this at a micro level, consider the example of Coolshirts, a t-shirt company that sells 10 t-shirts at a price of $9 each. The total revenue for Coolshirts is 10 t-shirts × $9, amounting to $90. This simple calculation is analogous to the way Nominal GDP is computed for an entire economy, albeit on a much smaller scale.
Economies of scale are another concept related to production and costs. As depicted in Figure 7.9, as a factory increases its output quantity, the average cost per product (e.g., alarm clock) typically decreases. A small factory producing 1,000 units at $12 each, a medium factory producing 2,000 at $8 each, and a large factory producing 5,000 at $4 each demonstrate how scaling up production results in lower average costs.