An economy produces on three goods: bread, housing and computers. Quantities and prices per unit for 2003 and 2004 are as follows: 2003 2004 Quantity Price Quantity Price Bread: 500,000 3 600,000 4 Housing: 3,000 500 4,000 600 Computers: 1,000 25 1,500 30 Taking 2003 as the base year, compute for each year: a. Nominal GDP b. Real GDP c. The implicit price deflator for GDP d. The rate of inflation between 2003 and 2004

Explanation:

The computation is shown below:

a. Nominal GDP

For the year 2003

= $3 × 500,000 + $500 × 3,000 + $25 × $1,000

= $1,500,000 + $1,500,000 + $25,000

= $3,025,000

For the year 2004

= $4 × 600,000 + $600 × 4,000 + $30 × 1,500

= $2,400,000 + $2,400,000 + $45,000

= $4,845,000

b. Real GDP

For the year 2003

= Nominal GDP of the year 2003

= $3,025,000

For the year 2004

= $3 × 600,000 + $500 × 4,000 + $25 × 1,500

= $1,800,000 + $2,000,000 + $37,500

= $3,837,500

c. The implicit price deflator is

= Nominal GDP for 2004 ÷ Real GDP for the year 2004

= $4,845,000 ÷ $3,837,500

= 1.26

d. The rate of inflation is

= (GDP deflator - 1) × 100

= (1.26 - 1) × 100

= 26%

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