In order to calculate the real GDP for 2001 we can use the GDP deflator formula, because deflator and nominal GDP for 2001 are given.
GDPreal2001=GDPnominal2001*100GDP deflator2001=10128*100102.4≈9890.6
The real GDP for 2002 can be calculated using GDP growth rate:
GDP growth ratet=GDPt-GDPt-1GDPt-1*100%
1.6%= GDPreal2002-9890.69890.6*100 → GDPreal2002≈10048.8
The formula for calculating the growth rate of GDP used in (a) is applicable here:
GDP growth rate=GDPt-GDPt-1GDPt-1*100%
GDPnominal2002 growth= 10469.6-1012810128*100%≈3.4%
GDPnominal2004 growth= 11734.3-10971.210971.2*100%≈3.4%
GDPreal2001 growth= 9890.6-98179817*100%≈0.7%
GDPreal2003 growth= 10320.6-10048.810048.8*100%≈2.7%
Nominal GDP for a specific year measures the value of produced goods during that year and in that year’s prices. In contrast, real GDP measures the value of the output using base year prices, which excludes the effect of inflation. Consequently, real GDP reflects the effectiveness and growth of the economy more accurately than nominal GDP.
The following is the formula for calculating the GDP deflator:
GDP Deflator=GDPnominal GDPreal *100
GDP Deflator2003=10971.210320.6*100≈106.3
GDP Deflator2004=11734.310755.7*100≈109.1
Given the data from the table, we can calculate inflation rate using either GDP deflator or CPI. The formulas for respective methods are as follows:
πt=CPIt-CPIt-1CPIt-1*100%
πt=GDP deflatort-GDP deflatort-1GDP deflatort-1*100%
Inflation rate using CPI:
π2001=177.1-172.2172.2*100%≈2.8%
π2004=184-179.9179.9*100%≈2.3%
Inflation rate using GDP deflator:
π2002=104.2-102.4102.4*100%≈1.8%
π2004=109.1-106.3106.3*100%≈2.6%
While measuring the inflation rate using CPI, we focus on the goods and services that are bought by consumers. By contrast, the inflation rate obtained from GDP deflator includes all products produced within a country. These two measures are not the same primarily because of two reasons. Firstly, there are some goods and services that consumers do not purchase, such as exports or military equipment for the government. Apart from that, consumers buy imported goods, which are not included in the calculation of the GDP. Therefore, the inflation rates obtained from CPI and GDP deflator differ.
