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.
my bad!
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?
Yes, you got it! To calculate real GDP, you would start with the initial GDP value of $1000 and then multiply it by the annual growth rate of 2% to get the real GDP for each subsequent year. So it would be $1000 * 1.02 for 1991, and then you would take that value and multiply it again by 1.02 for 1992, and so on until 1999.
For nominal GDP, you would use the inflation rates of 5% per year from 1991 to 1995 and 10% per year from 1996 to 1999. To calculate the nominal GDP, you would take the previous year's nominal GDP and multiply it by 1 plus the inflation rate.
So, for example, for nominal GDP in 1991, you would take the previous year's nominal GDP (which is $1000) and multiply it by 1 plus the inflation rate of 5%. This would give you $1000 * 1.05 = $1050 for 1991. Then for 1992, you would take the nominal GDP of 1991 ($1050) and multiply it by 1 plus the inflation rate of 5%, and so on for each year.
So to summarize:
a) Real GDP: Start with $1000 and multiply it by 1.02 for each subsequent year.
b) Nominal GDP: Start with $1000 and multiply it by 1 plus the respective inflation rate for each year.