Use the following information of an imaginary country Year 2014-15 2015-16 2016-17 Nominal GDP 6.5, 8.4, 9 GDP Deflated 100,140,125 For which year is Real GDP and Nominal GDP same and why ? Calculate Real GDP for the given years. Is there any year for which Real GDP falls ?

Question

Use the following information of an imaginary country Year 2014-15 2015-16 2016-17 Nominal GDP 6.5, 8.4,  9 GDP Deflated 100,140,125 For which year is Real GDP and Nominal GDP same and why ? Calculate Real GDP for the given years. Is there any year for which Real GDP falls ?

Answer

Real GDP Calculation and Analysis of an Imaginary Country

Nominal GDP and GDP Deflator

Year 2014-15: Nominal GDP - 6.5, GDP Deflator - 100

Year 2015-16: Nominal GDP - 8.4, GDP Deflator - 140

Year 2016-17: Nominal GDP - 9, GDP Deflator - 125

Real GDP Calculation

Real GDP is calculated by dividing the nominal GDP by the GDP deflator and multiplying it by 100. Real GDP for the given years are:

Year 2014-15: Real GDP = (6.5/100) x 100 = 6.5

Year 2015-16: Real GDP = (8.4/140) x 100 = 6

Year 2016-17: Real GDP = (9/125) x 100 = 7.2

Real GDP and Nominal GDP Comparison

Real GDP and Nominal GDP are same for the year 2014-15 as the GDP deflator for that year is 100, which means the prices of goods and services are the same as the base year and there is no inflation.

However, for the year 2015-16, the real GDP is less than the nominal GDP indicating inflation. Similarly, for the year 2016-17, the real GDP is more than the nominal GDP indicating deflation.

Analysis

Real GDP for the year 2014-15 is the highest among the three years. However, the growth rate of real GDP from 2014-15 to 2015-16 is negative, indicating a recession. The growth rate of real GDP from 2015-16 to 2016-17 is positive, indicating recovery.

Real GDP falls only in 2015-16 due to high inflation. The increase in prices of goods and services reduces the purchasing power of people, resulting in a decrease in real GDP.

In conclusion, the analysis of real GDP and nominal GDP helps in understanding the economic growth of a country and the impact of inflation on the economy.

Answer

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