Question

Fruitland is a closed economy that always produces and consumes 50 apples and 50 bananas. Initially both apples and bananas cost $1 each. Then demand shifts, so the price of apples doubles to $2 and the price of bananas halves to 50 cents, but production and consumption of apples and bananas stays the same.

Calculate the effect on: Nominal GDP, Real GDP, the GDP Deflator, and the Consumer Price Index.

Answer 1

Nominal GDP = P*Q

Real GDP = Base price X Q

GDP deflator =( NGDP/ RGDP)*100

Year	Quantity of apples	Quantity of bananas	Price of apples(in $)	Price of bananas(in $)	NGDP	RGDP	GDP deflator
Initial	50	50	1	1	50*1+50*1 = $100	50*1+50*1 =$100	(100/100)*100 =100
Next year	50	50	2	0.5	50*2+0.5*50 =125$	50*1+50*1 =100$	(125/100)*100 =125

Cost of basket in initial year = 50*1+50*1 = 100

Cost of basket after price change = 50*2+50*0.5 = 125

CPI = (125/100)*100 = 125