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 % .

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.