Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Using year 1 as the base year, compute nominal GDP, real GDP, and the GDP deflator for each year.

The answer is below

Explanation:

The nominal GDP is the market value of goods within a country adjusted for price change.

Nominal GDP for year 1 = Total market value of goods at current price = 3 bars × $4 = $12

Nominal GDP for year 2 = Total market value of goods at current price = 4 bars × $5 = $20

Nominal GDP for year 3 = Total market value of goods at current price = 5 bars × $6 = $30

The real GDP is the market value of goods within a country at current price.

Real GDP for year 1 = Total market value of goods at base year price = 3 bars × $4 = $12

Real GDP for year 2 = Total market value of goods at base year price = 4 bars × $4 = $16

Real GDP for year 3 = Total market value of goods at base year price = 5 bars × $4 = $20

GDP deflator is the ratio of nominal GDP to real GDP multiplied by 100.

GDP deflator in year 1 = (Nominal GDP in year 1 / Real GDP in year 1) × 100 = ($12/$12) × 100 = 100

GDP deflator in year 2 = (Nominal GDP in year 2 / Real GDP in year 2) × 100 = ($20/$16) × 125 = 100

GDP deflator in year 3 = (Nominal GDP in year 3 / Real GDP in year 3) × 100 = ($30/$20) × 100 = 150

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