Answer to Question #141195 in Macroeconomics for Carolyn

Question

Assume an economy has a nominal GDP of $100million.Assume also that the economy has experienced 2% inflation over the course of the year. Calculate the real GDP?

Answer 1

Given an economy's nominal GDP and inflation rate, real GDP is obtained by correcting nominal GDP for inflation. Real GDP is also called inflation-adjusted GDP captures the value of an economy's total sum of the goods and services produced in a given year, often expressed in terms of base-year prices. In this case, real GDP factors price changes from the base-year, which are brought about by $2$ % inflation rate. Real GDP is gotten by dividing nominal GDP by GDP deflator. The GDP deflator is a measure of inflation from the specified base-year used to remove effects of inflation from nominal GDP. If prices increased by $2$ % since the base year, the deflating factor is $1.02$, that is, $(100$ % + $2$ %$)$.

$Real GDP=\frac{Nominal GDP}{Deflator}$

$=\frac{100}{1.02}$

$=98.04$

$= \$98 million$

$\%$