Suppose that a simple economy produces only four goods and services: sweaters, CDs, sugar, and soft drinks. Assume one half of the sugar is used in making the soft drinks and the other half of the sugar is purchased by households.

Given that this is a simple economy, the simple GDP therefore will be given as: The sum total of all the products purchased in a given period by the households.

What is the calculation for Simple GDP?

The simple GDP of the economy described above is given as:

Product Quantity x Prices ($) = Revenue ($)

Sweaters 50 15 750

CDs 10 10 100

Sugar 200 0.9 180

Soft Drinks 400 0.75 300
Nominal GDP (Total Revenue) 1,330

Hence the nominal GDP = $1,330

What is the GDP Deflator?

Recall that the price of key items on the list had increased by 50%, hence the deflator is:

The ratio of base year to current year =
805/1,330

= 1,652174

≈ 1.65.

What is Real GDP?

Real GDP is given as:

R = N/D

Where R = Real GDP

N = Nominal GDP

D = GDP Deflator

Hence,

R = 1,330/1.65

Real GDP = $806.060606061

≈ $806.06

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