Now, assume that in year 3, the output mix changes again to 3 quarts of ice cream, 1 bottles of shampoo, and 3 jars of peanut butter. Consider the year 1 as the base year. 2.1. If the prices in year 3 are $5 per quart for ice cream, $4 per bottle of shampoo, and $3 per jar of peanut butter, what is the economy’s real GDP in year3? Place your answer here.   2.2. Compute nominal GDP, real GDP, and GDP price index in the year 1 and year 2. Complete the table below and show the calculation. Note that the base year is the year where the index is 100.  To calculate GDP price index, you have to divide the price of a collection of goods and services in the specific year (year 2 or year 3) by the price for the same goods and services in a base year (year 1) multiplied by 100. Nominal GDP is then divided by the price index (in hundredths) to determine real GDP. Table 1.     Good Price Year 1 Number of Goods Year 1 Nominal Value of Goods Year 1 Real Value of Goods Year 2 Price Year 2 Number of Goods Year 2 Nominal Value of Goods Year 2 Real Value of Goods Year 2 Price Year 3 Number of Goods Year 3 Nominal Value of Goods Year 3 Real Value of Goods Year 3 Quarts of Ice Cream $4.00 3 $12 $___   $4.00 5 $20  $___ $5.00 3 $ _____ $ _______ Bottles of Shampoo $3.00 1 $3 $____   $3.00 2 $6  $___ $4.00 1  $_____  $_______- Jars of Peanut Butter $2.00 3 $6 $____   $2.00 2 $4  $___ $3.00 3  $_____  $________ Nominal GDP NA NA $21  NA   NA NA $30   NA  NA NA  $_____ NA Real GDP  NA  NA NA  $_____    NA  NA NA $___ NA  NA NA  $_____ GDP Price Index  100 NA NA  NA  _____ NA  NA  NA  ____ NA NA  NA What would be the reason (s) of price changes in this a 3-good economy?

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Please note I have completed some of this myself, however I need you to finish it up. Thanks!

 

  1. Suppose that annual output in year 1 in a 3-good economy is 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter. In year 2, the output mix changes to 5 quarts of ice cream, 2 bottles of shampoo, and 2 jars of peanut butter.
    • If the prices in both years are $4 per quart for ice cream, $3 per bottle of shampoo, and $2 per jar of peanut butter, what was the economy’s nominal GDP in year 1? Show the calculation. Year one (3*$4)+(1*$3)=$12+$3+$6=$21
    •  

Recall that GDP is the core measure of an economy's health. Nominal GDP (also known as current–dollar economic statistics) is not adjusted to account for any price changes. To calculate nominal GDP (the value of all final goods and services evaluated at current-year prices) you have to use the formula: Nominal GDP= P*Q.

To get a real picture of a nation's economic growth economists prefer using real GDP. To calculate real GDP (the value of all final goods and services evaluated at base-year prices for each year) you have to use the formula: Real GDP= P*Q.

In this case, you have to follow a several steps. The first step is to find the value of each good consumed. The second step is to add up the nominal value for the goods for each year separately. 

 

Place your answer here. Year one: $21

 

 

1.2. What was its nominal GDP in year 2? Show the calculation.

Place your answer here. (5+$4)+(1*$3)+(3*$2)=$12+$3+$6=$30

 

 

 

 

  1. Now, assume that in year 3, the output mix changes again to 3 quarts of ice cream, 1 bottles of shampoo, and 3 jars of peanut butter. Consider the year 1 as the base year.

2.1. If the prices in year 3 are $5 per quart for ice cream, $4 per bottle of shampoo, and $3 per jar of peanut butter, what is the economy’s real GDP in year3?

Place your answer here.

 

2.2. Compute nominal GDP, real GDP, and GDP price index in the year 1 and year 2. Complete the table below and show the calculation.

Note that the base year is the year where the index is 100.  To calculate GDP price index, you have to divide the price of a collection of goods and services in the specific year (year 2 or year 3) by the price for the same goods and services in a base year (year 1) multiplied by 100. Nominal GDP is then divided by the price index (in hundredths) to determine real GDP.

Table 1.

 

 

Good

Price Year 1

Number of Goods Year 1

Nominal Value of Goods Year 1

Real Value of Goods Year 2

Price Year 2

Number of Goods Year 2

Nominal Value of Goods Year 2

Real Value of Goods Year 2

Price Year 3

Number of Goods Year 3

Nominal Value of Goods Year 3

Real Value of Goods Year 3

Quarts of Ice Cream

$4.00

3

$12

$___

 

$4.00

5

$20

 $___

$5.00

3

$ _____

$ _______

Bottles of Shampoo

$3.00

1

$3

$____

 

$3.00

2

$6

 $___

$4.00

1

 $_____

 $_______-

Jars of Peanut Butter

$2.00

3

$6

$____

 

$2.00

2

$4

 $___

$3.00

3

 $_____

 $________

Nominal GDP

NA

NA

$21

 NA

 

NA

NA

$30

 

NA

 NA

NA

 $_____

NA

Real GDP

 NA

 NA

NA

 $_____

 

 NA

 NA

NA

$___

NA

 NA

NA

 $_____

GDP Price Index

 100

NA

NA

 NA

 _____

NA

 NA

 NA

 ____

NA

NA

 NA

What would be the reason (s) of price changes in this a 3-good economy? 

Place your answer here.

 

2.4. How would you describe the difference between nominal GDP and real GDP in your own words?

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