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.

Answer and Explanation:

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%.


Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
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