Question

A country reported a real GDP growth of 4.17% from 2011 to 2012 and reported a GDP deflator
of 125 in 2012 and 120 in 2011. What happened to the country’s nominal GDP and price level
from 2011 to 2012 (Increased, decreased or remained the same)? Calculate the percentage change
of each.

Answer 1

Answer on Question #90002-Economics-Macroeconomics

Nominal GDP increased because Real GDP, which is always Nominal GDP adjusted for inflation, rose by 4.17%

Price level increased because deflator, which signals the rate of inflation, rose from 120 to 125.

Percentage Change in prices is equivalent to the change in GDP deflator

$$\begin{array}{l} = \frac{125 - 120}{120} * 100 \\ = 4.17\% \end{array}$$

Prices increased by 4.17%

From the relation, GDP deflator = Nominal GDP/Real GDP

We have 1.25 = nominal GDP/104.17

Nominal GDP = 1.25 * 104.17

=130.2125

Nominal GDP increased by 30.21%

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