Patrick Choi

ECO 201-005N

7/21/18

Ch 27 Writing Assignment

The purpose of this assignment is to assess Critical Thinking skills or stated differently “How to think like
an economist”.

Discuss the nature and function of a price index, and describe the difference between nominal and real
GDP, by answering the following questions:

1. Assume that nominal GDP for 2012 was $700B with a price index of 110 (using 2004 as the base year).
What is the real GDP for 2012?
Remember: To compute the real GDP for any given year use this formula: Real GDP = Nominal GDP/Price
Index x 100
2. Assume that nominal GDP for 2013 was $850B with a price index of 140 (using 2004 as the base year).
What is the Real GDP for 2013?
Remember the formula: Real GDP = Nominal GDP/Price Index x 100
3. Did real GDP increase or decrease from 2012 to 2013? If it decreased, explain why. If it increased
explain why. Compare your answers from question (1) and (2) above and answer question (3).
4. What are some reasons why Real GDP could decrease or increase in this example, and how a similar
situation could impact the future economic growth or decline of the U.S. economy?

1. The Real GDP is calculated using the following formula: Real GDP = Nominal GDP/Price Index x
100.

Real GDP = $700B/110 x 100

Real GDP for 2012 = $636B

2. Using the same formula as above, the Real GDP for 2013 can be calculated.

Real GDP = $850B/140 x 100

Real GDP = $607B

3. The Real GDP decreased from 2012 to 2013. This decrease is explained due to the price index
increase.
4. If the price index remained the same or was decreased, then the Real GDP from 2012 to 2013
would have increased due to the Nominal GDP increasing from 2012 to 2013. However, since
the price index was increased, the Real GDP decreased from 2012 to 2013. This situation allows
us to see trends in economic growth for the U.S. economy. The Real GDP will increase for the
U.S. economy if the price index decreases.