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1 December, 02:22

6. Problems and Applications Q6 Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $2. In year 2, the quantity produced is 5 bars and the price is $4. In year 3, the quantity produced is 7 bars and the price is $6. Using year 1 as the base year, compute nominal GDP, real GDP, and the GDP deflator for each year. Year Nominal GDP Real GDP GDP Deflator (Dollars) (Dollars) Year 1 Year 2 Year 3 The percentage growth rate of real GDP from year 2 to year 3 is %. The inflation rate as measured by the GDP deflator from year 2 to year 3 is %.

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  1. 1 December, 03:30
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    Year 1 GDP Deflator is 100%

    Year 2 GDP Deflator is 30%

    Year 3 GDP Deflator is 14.29%

    Inflation Rate between year 2 and year 3 is 50%

    The Real GDP growth Rate for Year 2 and year 3 is 110%

    Step-by-step explanation:

    Year 1

    Price of chocolate bar is $2 and 3 bars are sold that year so the real GDP is 3 x $2=$6 which we are also given that this year is the nominal base year so the nominal GDP is also $6. GDP is the sum of all market value produced products in an economy. Therefore that's why we calculated as the price of a chocolate multiplied the number produced. To calculate the GDP Deflator will be as follows:

    GDP Deflator = (nominal GDP/Real GDP) x 100

    = ($6/$6) x 100

    = 100%

    Year 2

    Price of chocolate bars is $4 per bar and 5 bars were produced therefore Real GDP = $4 x 5 = $20, now we will calculate the GDP deflator as we have been told that year is the nominal year therefore nominal GDP is $6.

    GDP Deflator = (nominal GDP/Real GDP) x 100

    = ($6/$20) x100

    = 30%

    Year 3

    Price of chocolate bars is $6 per bar and 7 bars were produced therefore Real GDP = $6 x 7 = $42, now we calculate the GDP deflator as we have been told that year 1 is the nominal year therefore nominal GDP is $6.

    GDP Deflator = (nominal GDP / Real GDP) x 100

    = ($6/$42)

    =14.29%

    Now we calculate the inflation rate between year 2 and year 3. we use the CPI (consumer price index to get the inflation rate for year 2 ad 3)

    Consumer Price Index = (Current price of bar/previous price of bar) x 100 formula for CPI

    = ($6/$4) x 100 = 150%-100%

    = 50% is the inflation rate as the consumer price gave us a positive value.

    Now we compute the real GDP growth rate between year 2 and year 3

    Real GDP growth rate = [ (current Real GDP - Previous Real GDP) / Previous Real GDP] x 100

    = ($42-$20) / $20

    = 110% so real GDP grew by 110% from year 2 to year 3.
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