Below are some data from the land of milk and honey. Year. Price of milk. Quantity of milk. 2012. 1. 100. 2013. 1. 200. 2014. 2.

To compute the nominal GDP, real GDP, and the GDP deflator for each year, we proceed as follows: ### a) Computation of Nominal GDP, Real GDP, and the GDP Deflator **1. Nominal GDP Calculation:** Nominal GDP is calculated using the current year prices and quantities. - **2012:** \[ \text{Nominal GDP} = (1 \times 100) + (2 \times 50) = 100 + 100 = 200 \] - **2013:** \[ \text{Nominal GDP} = (1 \times 200) + (2 \times 100) = 200 + 200 = 400 \] - **2014:** \[ \text{Nominal GDP} = (2 \times 200) + (4 \times 100) = 400 + 400 = 800 \] **2. Real GDP Calculation:** Real GDP is calculated using the base year prices (2012 prices) and current year quantities. - **2012 (Base Year):** \[ \text{Real GDP} = \text{Nominal GDP} = 200 \] - **2013:** \[ \text{Real GDP} = (1 \times 200) + (2 \times 100) = 200 + 200 = 400 \] - **2014:** \[ \text{Real GDP} = (1 \times 200) + (2 \times 100) = 200 + 200 = 400 \] **3. GDP Deflator Calculation:** The GDP deflator is calculated as: \[ \text{GDP Deflator} = \left(\frac{\text{Nominal GDP}}{\text{Real GDP}}\right) \times 100 \] - **2012:** \[ \text{GDP Deflator} = \left(\frac{200}{200}\right) \times 100 = 100 \] - **2013:** \[ \text{GDP Deflator} = \left(\frac{400}{400}\right) \times 100 = 100 \] - **2014:** \[ \text{GDP Deflator} = \left(\frac{800}{400}\right) \times 100 = 200 \] ### Summary of Results: | Year | Nominal GDP | Real GDP | GDP Deflator | |------|-------------|----------|--------------| | 2012 | 200 | 200 | 100 | | 2013 | 400 | 400 | 100 | | 2014 | 800 | 400 | 200 | ### b) Percentage Change in Nominal GDP, Real GDP, and GDP Deflator **1. Percentage Change Calculation:** The percentage change is calculated using the formula: \[ \text{Percentage Change} = \left(\frac{\text{Current Year Value} - \text{Previous Year Value}}{\text{Previous Year Value}}\right) \times 100 \] - **From 2012 to 2013:** - Nominal GDP: \[ \left(\frac{400 - 200}{200}\right) \times 100 = 100\% \] - Real GDP: \[ \left(\frac{400 - 200}{200}\right) \times 100 = 100\% \] - GDP Deflator: \[ \left(\frac{100 - 100}{100}\right) \times 100 = 0\% \] - **From 2013 to 2014:** - Nominal GDP: \[ \left(\frac{800 - 400}{400}\right) \times 100 = 100\% \] - Real GDP: \[ \left(\frac{400 - 400}{400}\right) \times 100 = 0\% \] - GDP Deflator: \[ \left(\frac{200 - 100}{100}\right) \times 100 = 100\% \] ### Summary of Percentage Changes: | Year Transition | Nominal GDP Change | Real GDP Change | GDP Deflator Change | |-----------------|--------------------|------------------|---------------------| | 2012-2013 | 100% | 100% | 0% | | 2013-2014 | 100% | 0% | 100% | ### Identification of Variables That Do Not Change: - **In 2013:** The GDP Deflator does not change (0%). - **In 2014:** The Real GDP does not change (0%). ### Explanation: - The GDP Deflator remaining constant in 2013 indicates that the increase in nominal GDP was entirely due to increases in real output rather than price changes. This makes sense because the quantities sold of both milk and honey increased, but prices did not change. - The Real GDP remaining constant in 2014 indicates that, even as nominal GDP rose significantly, the amount of goods produced (in real terms) did not increase (remained constant). The increase in nominal GDP was entirely due to inflation (as indicated by the significant rise in the GDP deflator), not due to an increase in the physical amount of goods produced. This shows that even though the overall economy (in nominal terms) was growing, the actual quantity of goods remained the same.