Consider a simple economy that produces two goods: pens and oranges. The following table shows the prices and quantities of the goods over a three-year period.

Pens Oranges

Price Quantity Price Quantity

2016 1 150 2 160

2017 2 135 4 230

2018 3 110 4 165

Use the information from the preceding table to prepare real GDP and nominal GDP.

Year Nominal GDP Real GDP

2016 470 310

2017 1,190 595

2018 990 440

Explanation:

The question is to determine both the real GDP and teh nominal GDP of the economy in question for the three yeras

First, the Formula for

Nominal GDP = Price (Dollar Per Pen) x Quantity (Number of Pens) + Price (Dollars Per Orange) x Quantity (Number of Oranges)

Real GDP = 1 x Quantity (Number of Pens) + 2 x Quantity (Number of Oranges)

Note for Real GDP we use the Price for Pen and Orange for 2016 as the base for all the years.

Finally, the Formula for the GDP Deflator = Nominal GDP / Real GDP

Based on these formulas, we calculate the yearly Nominal and Real GDPs

2016 =

Nominal GDP = 1 x 150 + 2 x 160 = 470

Real GDP = 1 x 150 + 2 x 160 = 310

GDP Deflator = 470/470 x 100 = 100%

2017 = We use the price of 2016 as the base year in dollars for real GDP

Nominal GDP = 2 x 135 + 4 x 230 = 1,190

Real GDP = 1 x 135 + 2 x 230 = 595

GDP Deflator = 1,190/595 x 100 = 200%

2018 = We use the price of 2016 as the base year in dollars for real GDP

Nominal GDP = 3 x 110 + 4 x 165 = 990

Real GDP = 1 x 110 + 2 x 165 = 440

GDP Deflator = 990/440x 100 = 225%