Question

Assume there only two goods in the economy: french fries and onion rings. In 2019, 1,000,000 servings of french fries were sold for $0.40 each and 800,000 servings of onion rings were sold for $0.60 each. From 2019 to 2020, the price of french fries rose to $0.50 and the servings sold fell to 900,000; the price of onion rings fell to $0.51 and the servings sold rose to 840,000. Calculate nominal GDP in 2019 and 2020. Calculate real GDP in 2020 using 2019 prices. Why would an assessment of growth using nominal GDP be misguided

Answer 1

nominal GDP in 2019 = $880,000

nominal GDP in 2020 = $878400

Real GDP in 2020= $864,000

An assessment of growth using nominal GDP would be misguided because some of the growth in 2020 GDP would be as a result of inflation. As a result of inflation, nominal GDP would be greater by real GDP

Step-by-step explanation:

Gross domestic product is the total sum of final goods and services produced in an economy within a given period which is usually a year

GDP calculated using the expenditure approach = Consumption spending by households + Investment spending by businesses + Government spending + Net export

Nominal GDP is GDP calculated using current year prices while Real GDP is GDP calculated using base year prices. Real GDP has been adjusted for inflation

Nominal GDP in 2019 = ( 1,000,000 x $0.40 ) + ( 800,000 x $0.60) = $880,000

Nominal GDP in 2020 = ( $0.50 x 900,000 ) + ($0.51 x 840,000) = $878,400

Real GDP in 2020 = ( $0.40 x 900,000 ) + ($0.60 x 840,000) = $864,000