Nominal GDP GROWTTH QUESTION?

Question

Suppose nominal GDP rose from 6250 billion in 1995 to 6630 billion in 1996. If the GDP deflator rose from 125 to 130 during this time, what was the percent growth in real GDP?

Answer 1

Deflator change = 130/125=1.04 =+4%

Nominal GDP change = 6630/6250=1.0608 = +6.08%

Real GDP change = 1.0608/1.04=1.02=+2%

♦ Answer: Real GDP growth = +2%

Answer 2

There are two ways of doing this:

(A). Compute the real gdps in two years by dividing the nominal gdps by the respective year's gdp deflator and multiplying by 100 and then work out the percentage change in real GDP. Thus,

GDP (1995) = (6250/125)*100 buillion= 5000.billion

GDP (1996) = (6630/130)*100 billion= 5100.billion.

So, the GDP growth rate works out to (5100-5000)/5000=100/5000= 1/50= 2/100= 0.02= 2%

(b) the alternative is to find the percentage change in  nominal gdp and the percentage change in gdp deflator and take the difference because growth in nominal gdp is the sum of the growth in real gdp and the growth in gdp deflator (roughly inflation rate). Thus,

growth rate in nominal gdp is (6630-6250)/ 6250= 380/6250= 0.0608 = 6.08%

growth rate of gdp deflator= (130-125) /125= 0.04= 4%

So, the growth rate in real GDP= (6.08- 4) % = 2.08% which is approximately 2%

The small difference in the two calculated real gdp growth rate under two methods is due to the fact that the second method is applicable for small, continuous changes as is done in differential calculus.