Question

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

 Use the information from the preceding table to fill in the following table.

 From 2018 to 2019, nominal GDP _______  . and real GDP _______ .

 The inflation rate in 2019 was _______ .

 Why is real GDP a more accurate measure of an economy's production than nominal GDP? 

• Real GDP is not influenced by price changes, but nominal GDP is.

• Nominal GDP is adjusted for the effects of inflation or deflation, whereas real GDP is not. 

• Real GDP includes the value of exports, but nominal GDP does not.

Answer 1

							Nominal GDP				Real GDP
	2017 (base year)		2018		2019		Expenditure in 2017 $	Expenditure in 2018 $	Expenditure in 2019 $		Expenditure in 2017 $	Expenditure in 2018 $	Expenditure in 2019 $
	Price ($ )	Quantity	Price ($ )	Quantity	Price ($ )	Quantity
Cupcakes	1.00	115	2.00	150	4.00	120	115	300	480		115	150	120
Muffin	2.00	175	4.00	180	4.00	200	350	720	800		350	360	400
							465	1020	1280		465	510	520
GDP deflator = (Nominal GDP/Real GDP)100
Nominal GDP: the value of final goods and services at current prices
Real GDP: The value of final goods and services at base year prices
Base year is 2017, both nominal GDP and real GDP in base year are the same.
Between 2018 and 2019, nominal GDP increased from $1020 to $1280.
Real GDP increased from $510 to $520
Year	Nominal GDP ($)	Real GDP (Base year 2014 ($))	GDP Deflator
2018	1020	510	200
2019	1280	520	246.2
GDP deflator = (Nominal GDP/Real GDP)100
Inflation rate as measured by the GDP deflator from 2018 to 2019= ((246.2-200)/200))*100=23.1%
Real GDP is not influenced by price changes as base year prices are only considered.