Essay: Analysis of Various Economic and Accounting Concepts

Sample Essay

A1)      The real GDP is calculated for the years given in Table 1 by dividing Nominal GDP for the year by the price index for that year and multiplying by 100. Table 1 shows the table given in the question along with the computed values of Real GDP. The mathematical formula applied is Real GDP = Nominal GDP/PI*100, where PI denotes Price Index. For example, in the year 1960, Nominal GDP is 527.4 billion and PI is 22.19 (base year is 1996).

So Real GDP for 1960 is equal to 527.4 billion/ 22.19 * 100 = $ 2376.7 billion. This means that according to the price level in 1996, the Real GDP in 1960 is higher than the Nominal GDP in 1960. Therefore, we are inflating the nominal data in 1960 to bring it to the price level in 1996. The same procedure was applied in the years 1968, 1978 and 1988 and the results are shown in Table 1. In 1998, the price index is higher than in 1996 (103.22 as compared to 100 in 1996). This means that we deflate the Nominal GDP in 1998 to bring its price index to 100 so that a comparison is possible between 1996 and 1998.

Year Nominal GDP ($Billion) Price Index – 1996=100 Real GDP ($ Billion)
1960 527.4 22.19 2376.7
1968 911.5 26.29 3467.1
1978 2295.9 48.22 4761.3
1988 4742.5 80.22 5911.9
1998 8790.2 103.22 8516.0

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