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2. Measuring a Nation’s Income
3. Nominal GDP is the production of goods and services valued at
current prices. Real GDP is the production of goods and services
valued at constant prices. Real GDP is a better measure of
economic well-being because it reflects the economy’s ability to
satisfy people’s needs and desires. Thus a rise in real GDP means
people have produced more goods and services, but a rise in
nominal GDP could occur either because of increased production or
because of higher prices.
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5. Calculating nominal GDP:

6. 2001: (\$1 per qt. of milk  100 qts. milk) + (\$2 per qt. of honey 
50 qts. honey) = \$200

7. 2002: (\$1 per qt. of milk  200 qts. milk) + (\$2 per qt. of honey 
100 qts. honey) = \$400

8. 2003: (\$2 per qt. of milk  200 qts. milk) + (\$4 per qt. of honey 
100 qts. honey) = \$800

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10. Calculating real GDP (base year 2001):

11. 2001: (\$1 per qt. of milk  100 qts. milk) + (\$2 per qt. of honey 
50 qts. honey) = \$200

12. 2002: (\$1 per qt. of milk  200 qts. milk) + (\$2 per qt. of honey 
100 qts. honey) = \$400

13. 2003: (\$1 per qt. of milk  200 qts. milk) + (\$2 per qt. of honey 
100 qts. honey) = \$400

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15. Calculating the GDP deflator:

16. 2001: (\$200/\$200)  100 = 100

17. 2002: (\$400/\$400)  100 = 100

18. 2003: (\$800/\$400)  100 = 200

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34. Real GDP in 1997 (in 1992 dollars) is \$8. The growth rate of the deflator is (112 . \$8. 8.6 27.9%. b. The growth rate of real GDP is (\$7.242 . \$7.965)/ \$6. 33. 21. 110 6 62 28.242.\$6.662  100% = 5. 41. 38. 37. 22.662/ (110/100) = \$6.111/ (112/100) = \$7.1 30. 7.965. The growth rate of nominal GDP is higher than the growth rate of real GDP because of inflation. Ye 23. 20. Real GDP in 1996 (in 1992 dollars) is \$7.8%.965  100% = 4.0%.\$7.110)/110  100% = 1. 112 7 11 31. 40. 42. 6. a. GDP ar inal Deflator GDP (base (billion year: s) 1992) 25. c. 199 29. 2 . e.111 .662)/ \$7. Nom 24. 35. f. d. 32. 199 26. The growth rate of nominal GDP is (\$8. 39. 36.

If the government cares about the total amount of economic activity occurring in the United States. 45. 46. whether produced by domestic citizens or foreigners. since that measure includes the income of Americans that is earned abroad. 44. it will emphasize GNP. 2.1. 47. 3 . 3. 43. 48. which measures production in the country. it will emphasize GDP. If the government cares about the total income of Americans.

10.9. . 49.