a)
The question requires us to determine nominal GDP in year 1.
a)
Answer to Problem 1FRQ
The value of nominal GDP in year 1 is $10030.
Explanation of Solution
Real GDP is the value of GDP calculated at the base year prices. It is the inflation-adjusted value of all final goods and services in a given year in an economy.
The nominal GDP is calculated by using the current year's prices as it doesn’t adjust for inflation.
From the table:
The cost of a basket in year 1:
The value of nominal GDP in year 1 is $10,030.
b)
The question requires us to determine real GDP in year 1.
b)
Answer to Problem 1FRQ
The value of real GDP in year 1 by using the prices of year 1 is $10,030.
Explanation of Solution
In the base year value of real GDP equals the value of nominal GDP because both estimations are using the base year quantity and base year prices.
So, the value of real GDP in year 1 by using the prices of year 1 is $10030.
The value of real GDP:
c)
The question requires us to determine real GDP in year 2.
c)
Answer to Problem 1FRQ
The value of real GDP in year 2 using prices of the base year is $11,945.
Explanation of Solution
Real GDP is the value of GDP calculated at the base year prices. It is the inflation-adjusted value of all final goods and services in a given year in an economy.
The nominal GDP is calculated by using the current year's prices as it doesn’t adjust for inflation.
From the table:
The cost of the basket in year 2 (by using year 1 as the base year):
The value of real GDP in year 2 using prices of the base year is $11,945.
Chapter 11 Solutions
Krugman's Economics For The Ap® Course
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