Answer to GDP question in Q3

Click here for the problem:

Answer:

Nominal GDP for 1997

100 spears * $1 = $100
200 Horses *$2 = $400

Nominal GDP for 1997 = $500

Nominal GDP for 1998

200 spears * $2 = $400
300 horses * $3 = $900

Nominal GDP for 1998 = $1300

To calculate the change => (1300-500)/500 = 1.6 * 100 = 160%

For Real GDP I asked you to use 1998 prices, so we have to change 1997 to 1998 prices. We can do this by multiplying the output in 1997 by the prices in 1998

100 spears * $2 = $200
200 Horses *$3 = $600

Real GDP for 1997 = $800

Since we asked for 1998 prices, no correction has to be done for 1998. That is, nominal GDP for the base year (the year we are using as the price level) is equal to real GDP

To calculate the change:

(1300-800)/800 = 0.625 *100 = 62.5%

*Note = Some people you used 1997 prices may have gotten a slightly different answer. This is a problem inherent to this method, which is why the government uses a more complicated method. But the principle is the same and that is what we are interested in.