Question

1. Assume there are only two goods in the economy, french fries and onion rings. In 2013, 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 2013 to 2014, 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. a. Calculate nominal GDP in 2013 and 2014. Calculate real GDP in 2014 using 2013 prices. b. Why would an assessment of growth using nominal GDP be misguided

Answer 1

A. Nominal GDP in 2013 = $880,000

Nominal GDP in 2014 = $878,400

Real GDP in 2014 = $864,000

B. An assessment of growth using nominal GDP would overstate growth due to the effect of inflation on 2014 prices. The real GDP was lower than the nominal 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 2013 = ( 1,000,000 x $0.40 ) + ( 800,000 x $0.60) = $880,000

Nominal GDP in 2014 = ( $0.50 x 900,000 ) + ($0.51 x 840,000) = $878,400

Real GDP in 2014 = ( $0.40 x 900,000 ) + ($0.60 x 840,000) = $864,000

An assessment of growth using nominal GDP would overstate growth due to the effect of inflation on 2014 prices. The real GDP was lower than the nominal GDP