Worksheet – Unit 7

Data for GDP and GROWTH Questions for the  Imaginary Land of Lukistan (for questions 1-3)

Data Table GDP-1: (used for questions 1-5)
Lukistan is a small hypothetical country run by the benevolent dictator economist for whom the country is named.  In the years 1990 through 1994 it recorded the following macroeconomic performance.   Using the data in this table, you should first calculate the data for the empty cells in this table

 Year Nominal GDP Real GDP (millions of 1991 \$) Price Index (1991 = 100.00) Growth (%) in Nominal GDP from previous year Growth (%) in Real GDP from previous year 1990 4,327 4,545 95.2 16% 10% 1991 5,000 5,000 100.0 16% 10% 1992 5,288 5,500 1993 6,050 110.5 1994 6,812 114.9

Data for INFLATION Questions for the Imaginary Land of Lukistan (for questions 4 & 5)

Data Table Inflation-Table 2: Lukistan is a small hypothetical country run by the benevolent dictator economist for whom the country is named.  In the years 1990 through 1994 it recorded the following macroeconomic performance.   Using the data in this table, you should first calculate the data for the empty cells in this table.  Do not compare this data to any data you might find for Lukistan in other worksheets.  Since Lukistan is imaginary, history changes at the whim of the teaching professor.

Year GDP Deflator Inflation Rate
1990 92.0
1991 95.0
1992 100.0
1993 105.0
1994 110.5
1995 108.2

A. Relationship between Nominal, Real, and Price Index

Like many calculations in economics, what we have is a defined mathematical relationship or equation that has several variables in it.  In this case, there are three variables:  a nominal GDP amount, a “real” GDP amount, and a value for the price index for that year. The way these three are related is:

Like any such math relationship, if we know any two of the variables, we can calculate the third. So, for example, if we know NominalGDP and we know the PriceIndex, we can calculate RealGDP. Let’s suppose the NominalGDP in the year 2005 is \$6,000 million. (this is a pretty small country). Let’s also suppose the PriceIndex for the year 2005 in this country is 120.00 using a price index for which the base year was 1999. Let’s calculate the RealGDP by rearranging our earlier formula to isolate RealGDP and then we will plug in the values for the two variables we know. We get an answer of \$5,000 for RealGDP.

We get an answer of \$5,000 for RealGDP. What does this number represent? What does it tell us? Well, it tells us that if quantities of the physical goods and services produced in the year 2005 were sold at the prices that existed back in 1999 (the base year), the total value would have been \$5,000. This is RealGDP number for 2005 is also sometimes referred to as representing “2005 GDP at 1999 prices” or as “2005 GDP in 1999 dollars”.

But what if we only knew the RealGDP number and the PriceIndex, but didn’t know nominal GDP? Again, we could rearrange the original formula and plug in the numbers we have and calculate:

We get a value of \$6,000 for NominalGDP. Of course, in real life economists usually already know the nominal amount because it is what can be directly observed by counting people’s actual purchases. Usually we are calculating the RealGDP.

It is possible, of course, that we may know NominalGDP and RealGDP, but the economist who gave you that data didn’t tell you the value for the price index she used. You can calculate it:

B. Calculating Growth Rates (and the Inflation Rate is the “growth rate of price index for one year”)

Generally, the reason we want to know Real GDP is because we are interested in the rate of real growth in the economy – the rate at which we are actually being able to produce more goods and services than before. If the growth rate is a positive percentage number, it means the economy is growing and there are more goods becoming available to support more people and better living standards. If the growth rate is negative.

To calculate a growth rate for the current year, we need the same variable from two different years: the current year and the previous year. Then we calculate as follows:

The times by 100 is only necessary to convert the decimal fraction into a true percentage number.

Thus, suppose we have a RealGDP of \$5,000 in the year 2004 and \$5,334 in the following year, 2005. Then the percentage growth from 2004 to 2005 is:

In this case we got a 6.7% Real Growth in the economy in one year. Although possible, a 6.7% real growth in just one year is relatively rare in a modern,  economy such as the U.S., Canada, Japan, or Western Europe. Normally, real growth rates are in the 2-5% range for such nations.