Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In

year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is 56.

Year 1 is the base year.

a? What is nominal GDP for each of these three years?

b. What is real GDP for each of these years?

c What is the GDP deflator for each of these years?

d. What is the percentage growth rate of real GDP from year 2 to year 3?

e. What is the inflation rate as measured by the GDP deflator from year 2 to year 3?

f. In this one-good economy, how might you have answered parts (d) and (e) without first answering parts (b) and (c) ?

a. The nominal GDPs are the following: Year 1 = $12, Year 2 = $20, Year 3 = $30.

b. The real GDPs are the following: Year 1 = $12, Year 2 = $16, Year 3 = $20.

c. The GDP Delators are the following: Year 1 = 1, Year 2 = 1.25, Year 3 = 1.5.

d. The percentage growth rate of real GDP from Year 2 to Year 3 is 25%.

e. The inflation rate as measured by the GDP deflator from year 2 to year 3 is 20%

f. Having a single product makes it easy to find these values. If this had been the case with many products, it would have been difficult to answer. In part d, the solution could only have been found by dividing year 1 by the quantity of year 2 and subtracting from 1. In part e the solution would have been found by dividing the price of year 3 by the price of year 2 and subtract 1.

Explanation:

a - b. Nominal GDP is the GDP without the effects of inflation or deflation. Nominal GDP reflects current GDP at current prices.

c. GDP Delator = Nominal GDP / Real GDP.

d. The percentage of real growth from Year 2 to Year 3 is : (Real GDP Year 3 / Year GDP Year 2 - 1) * 100.

($20/$16 - 1) * 100 = 25%

e. The inflation rate from Year 2 to Year 3 is : ((Year 3 GDP Deflator / Year 2 GDP Delator - 1) * 100.

(1.5/1.25 - 1) * 100 = 20%