Exercises: Real vs. Nominal GDP and the GDP Deflator

Define nominal GDP and real GDP in one sentence each. Then state which of the two can rise even when the quantity of goods and services produced does not change, and explain why.

An economy has nominal GDP of $\$2{,}400$ billion in the current year. The GDP deflator for that year is 120, with a base year value of 100. Compute real GDP for the current year, in base-year dollars.

Real GDP in an economy was $\$20{,}000$ billion last year and $\$20{,}600$ billion this year. Compute the growth rate of real GDP. Does the result tell you anything about whether prices rose? Explain.

An economy reports the following data.

Compute real GDP in year 2. Then compute the growth rate of nominal GDP and the growth rate of real GDP from year 1 to year 2, and explain why the two rates differ.

A small economy produces only pizzas and sodas. In year 1 (the base year), pizzas sell for $\$10$ and sodas for $\$2$, and the economy produces 100 pizzas and 200 sodas. In year 2, pizzas sell for $\$12$ and sodas for $\$3$, and the economy produces 110 pizzas and 200 sodas. Compute nominal GDP in both years, real GDP in year 2 using year 1 prices, and the GDP deflator for year 2.

Country A has a higher real GDP per capita than Country B. However, people in Country B work fewer hours, spend more time on unpaid household work and volunteering, and live with much cleaner air. Explain two reasons real GDP per capita may be an imperfect measure of well-being when comparing these countries. Give one example of an activity GDP leaves out and one example of something GDP counts that may not raise well-being.

An economy reports the following data.

(a) Compute real GDP for each year. (b) Compute the growth rate of nominal GDP and of real GDP for years 2 and 3. (c) A headline in year 2 reads "Economy grows 8%." Evaluate whether the headline accurately describes the change in output, and say in which year, if either, the economy actually produced more. Use your numbers.

A country has nominal GDP of $\$900$ billion, a GDP deflator of 150 (base year = 100), and a population of 20 million people. (a) Compute real GDP and real GDP per capita (in dollars per person). (b) Suppose an underground economy equal to 10% of reported real GDP goes unrecorded. Compute the true real GDP per capita, assuming the unrecorded output is valued at base-year prices. (c) Explain why even accurate real GDP per capita may fail to capture well-being, giving two specific limitations.