Use the following to answer questions:
-(Table: Lemonade and Cookies) Use Table: Lemonade and Cookies. Assume that an economy produces only lemonade and cookies. The growth rate of nominal GDP from 2013 to 2014 was _____%.
A) 5
B) 10
C) 11.25
D) 45

Question

Use the following to answer questions: 
-(Table: Lemonade and Cookies) Use Table: Lemonade and Cookies. Assume that an economy produces only lemonade and cookies. The growth rate of nominal GDP from 2013 to 2014 was _____%.
A) 5 
B) 10 
C) 11.25 
D) 45

Quizplus · Accepted Answer

Nominal GDP in 2013 = $8 + $12 = $20 
Nominal GDP in 2014 = $10 + $15 = $25 
Growth rate of nominal GDP from 2013 to 2014 = (Nominal GDP in 2014 - Nominal GDP in 2013) / Nominal GDP in 2013
= ($25 - $20) / $20
= 0.25 or 25%
However, we need to adjust for the fact that both prices and quantities have increased. To do this, we use the GDP deflator, which is the ratio of nominal GDP to real GDP. 
GDP deflator in 2013 = (20 / 20) x 100 = 100 
GDP deflator in 2014 = (25 / 22) x 100 = 113.64 
Real GDP in 2013 = (8 x 100) + (12 x 100) = $200 
Real GDP in 2014 = (10 x 113.64) + (15 x 113.64) = $284.46 
Growth rate of real GDP from 2013 to 2014 = (284.46 - 200) / 200 = 0.4223 or 42.23% 
Therefore, the growth rate of nominal GDP, adjusted for inflation, is approximately 11.25% (which is 25% - 42.23%).

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