# Suppose an extremely simple economy produces only two goods, pillows and rugs. In the first year,...

## Question:

Suppose an extremely simple economy produces only two goods, pillows and rugs. In the first year, 50 pillows are produced and sold at $5 each; 11 rugs are produced and sold at$50 each. In the second year, 56 pillows are produced and sold for $5 each; 12 rugs are produced and sold at$60 each.

a. What is the nominal GDP in each of the two years?

b. What is the growth rate of nominal GDP?

## Gross Domestic Product or GDP

The GDP is a measure of the economic power of a country, state, city, or geographical region. It is the sum of the value of all the goods and services produced by the region within a given timeframe such as a year or a quarter. GDP has different components such as consumption, private investment, government spending. Nominal GDP is the value of goods in terms of dollars of the current year.

We'll first tabulate the information given in the question for each year separately:

Table 1 for the first year:

Goods Type Quantity Price Value
Pillow 50 5 250
Rug 11 50 550
Total 800

Table 2 for second-year:

Goods Type Quantity Price Value
Pillow 56 5 280
Rug 12 60 720
Total 1000

We'll answer the questions using the tables above.

#### a. Nominal GDP for each year

The nominal GDP for Year 1 is the total of the value of the goods produced in year 1. Referring to Table 1 above, the total value or GDP is $800. The nominal GDP for Year 1 is the total of the value of the goods produced in year 2. Referring to Table 2 above, the total value or GDP is$1000.

Therefore the Nominal GDP for Year 1 is $800 and Year 2 is$1000.

#### b. Growth rate of nominal GDP

From part a. above, the nominal GDP for the first year is $800 and for the second year, it is$1000. So, the growth rate of nominal GDP is: \begin{align*} g &= \frac{1000 - 800}{800}\\ &=\frac{200}{800}\\ &=25\% \end{align*}

Therefore, the growth rate of the nominal GDP is 25%.