A simple way to get the real GDP for a particular year is by using the GDP deflator. This is the factor that transforms nominal GDP to Real GDP. It is calculated by the following formula:
GDP deflator = (nominal GDP/ real GDP) * 100
The GDP deflator for the base year is always equal to 100% by definition. Because of this the Nominal GDP and the Real GDP for the base year are always equal. In this case, the Real GDP for 2002= Nominal GDP for 2002= 1. 02 Billion Dimmens since it is the base year.
In getting the Real GDP for 2003, we can use the GPP price index formula. The formula is
GDP Price Index = nominal GDP / real GDP
Therefore, the Real GDP for 2003= nominal GDP / GDP price index
= 1. 08/ 105
= 0. 0103
2. Did the people of Dimmenland have a larger economy in 2002 or in 2003?
In determining the size of the economy, we look at the nominal GDP between the two years. The year 2002 has a nominal GDP of 1. 02 billion dimmers while 2003 has a nominal GDP of 1. 08 billion dimmers. Thus the economy has grown in the year 2003.
3. You have been hired by the government as an economic statistician and given the job of calculating the CPI (the chili price index, not the consumer price index). According to the government’s official recipe, the ingredients for a batch of chili are 3 pounds of hamburger, 2 pounds of tomatoes, and ½ pound of onions. The base year calculating the CPI is 1996. The prices of the ingredients for chili are determined by an extensive nationwide survey. The current and 1996 prices for the ingredients are:
Hamburger: $1. 20 per pound in 1996; $1. 15 per pound currently
Tomatoes: $1. 550 per pound in 1996; $1. 75 per pound currently
Onions: $. 20 per pound in 1996; $. 30 per pound currently.
Calculate the cost of a batch of chili in 1996 and currently, and express the current price as a price index with 1996 as the base year
Cost of a batch of Chili in 1996= 1. 20 * 3 = 3. 6
1. 550 * 2 = 3. 1
0. 20 * 0. 5 = 0. 10
Total = 6. 8
Cost of a batch of Chili currently= 1. 15 * 3 = 3. 45
1. 75 * 2 = 3. 5
0. 30 * 0. 5 = 0. 15
Total = 7. 1
The price index will be 7. 1/ 6. 8 = 1. 044
