chapter 6.2 part 3

Question 1

If the base year is 2012, why will real GDP appear higher than nominal GDP in the years before 2012?

Answer 1

Because dollars were worth less in 2012 compared to previous years.

Question 2

If the base year is 2012, why will real GDP appear lower than nominal GDP in the years after 2012?

Answer 2

Because dollars were worth more in 2012 than in later years.

Question 3

How do you find the real growth rate from 1960 to 2020?

Answer 3

(2020 real GDP - 1960 real GDP) / (1960 real GDP) * 100 = percentage change.

Question 4

What does the real growth rate fail to consider?

Answer 4

Material improvements such as quality of products and inventions of new products.

Question 5

What information do you need to find the real growth rate using another method?

Answer 5

Nominal = price * quantity
%change in nominal = %change in price + %change in quantity
or
%change in quantity = %change in nominal - %change in price.

Therefore, real GDP growth rate (% change in quantity) equals the growth rate in nominal GDP (% change in value) minus the inflation rate (% change in price).

Question 6

Why is using the %change in quantity = %change in nominal - %change in price method not a good idea?

Answer 6

It is an approximation for small changes in all levels. For more accurate measurements, you should use the first formula.