Economic

posted by Freddy

All of the following refer to the Economy of Ecoland:
- GDP in 1990 is \$1000
- Annual inflation is 5% per year from 1991 - 1995. From 1996 - 1999, inflation is 10% per year
- Real GDP grows at 2% every year

a) Calculate real GDP from 1990 to 1999
b) Calculate nominal GDP in every year from 1990 to 1999

I think I know how to do it but I want to make sure it's correct. For real GDP, do I first use 1000 and multiply it by 102% to get the real GDP for 1991 and then use that amount and multiply 102% to get the real GDP for 1992 and so on?

No. Real GDP growth is growth in excess of the inflation rate. So Real GDP grows by 7% in the first 5 years, 12% in the next 4.

(Note some would argue that GDP growth is 7.1% in your example the 2% growth occurs on top of the 5% inflation growth. (1.05)*(1.02) = 1.071) But I personally would go with the simple 7% nominal growth rate.

Oh Okay, so would you say that the nominal growth rate is 7% for the first 5 years (1.05*1.02) and then 12% the next 4 (1.1*1.02)?

As I re-read what I wrote, I think i botched it. Nominal GDP growth is growth in excess of inflation. Real GDP growth is 2% per year. You had it right the first time.

Oh Okay, so do clarify. To calculate real GDP i just plug 1000*1.02 and then use that value and multiply it again with 1.02 and so on to get the real gdp for the rest of the years. And the nominal gdp is 5% and 10% not 7% and 12% correct?

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