Question

Tropical Republic produces only bananas and coconuts. The base year is 2013 , and the table gives the quantities produced and the market prices. $$\begin{array}{lcc} \text { Quantities } & 2013 & 2014 \\ \hline \text { Bananas } & 800 \text { bunches } & 900 \text { bunches } \\ \text { Coconuts } & 400 \text { bunches } & 500 \text { bunches } \\ \text { Prices } & 2013 & 2014 \\ \hline \text { Bananas } & \$ 2 \text { a bunch } & \$ 4 \text { a bunch } \\ \text { Coconuts } & \$ 10 \text { a bunch } & \$ 5 \text { a bunch } \end{array}$$ Calculate nominal GDP in 2013 and 2014

Short answer

Nominal GDP for 2013 is 5600 dollars, and for 2014 is 6100 dollars.

Step-by-step solution

Understand Nominal GDP

Nominal GDP is calculated by multiplying the quantity of each good produced by its market price in the given year. This means we will calculate the total value of produced bananas and coconuts at their respective prices for each year.

Calculate Nominal GDP for 2013

In 2013, the quantity and price for bananas are 800 bunches and \(2 per bunch, respectively. For coconuts, there are 400 bunches at \)10 per bunch. Using these values, we get:\text{Nominal GDP (2013)} = (800 \text{ bunches} \times 2 \text{ dollars/bunch}) + (400 \text{ bunches} \times 10 \text{ dollars/bunch})\text{Nominal GDP (2013)} = (1600 \text{ dollars}) + (4000 \text{ dollars})\text{Nominal GDP (2013)} = 5600 \text{ dollars}

Calculate Nominal GDP for 2014

In 2014, the quantity and price for bananas are 900 bunches and \(4 per bunch, respectively. For coconuts, there are 500 bunches at \)5 per bunch. Using these values, we get:\text{Nominal GDP (2014)} = (900 \text{ bunches} \times 4 \text{ dollars/bunch}) + (500 \text{ bunches} \times 5 \text{ dollars/bunch})\text{Nominal GDP (2014)} = (3600 \text{ dollars}) + (2500 \text{ dollars})\text{Nominal GDP (2014)} = 6100 \text{ dollars}

Key concepts

GDP

Gross Domestic Product (GDP) is one of the most important indicators of an economy's health. It measures the total market value of all final goods and services produced within a country in a specified period of time, typically a year. GDP can be calculated using three approaches: production (or output), income, and expenditure. The exercise focuses on the production approach, specifically on nominal GDP.
Nominal GDP does not account for inflation, meaning it reflects the value of goods and services at current prices during the year they were produced. For example, in the exercise, we calculated the nominal GDP for the Tropical Republic for 2013 and 2014 by multiplying the quantities of bananas and coconuts produced by their respective market prices in those years. This gives us the total production value, measured in current dollars, for each year.

Quantities and Prices

Understanding the role of quantities and prices in GDP calculation is crucial. Let's break it down:

• Quantities: This represents the amount of each good or service produced. In our exercise, for instance, in 2013, 800 bunches of bananas and 400 bunches of coconuts were produced. These quantities increased to 900 bunches of bananas and 500 bunches of coconuts in 2014.
• Prices: This indicates the market price per unit of each good or service in the given year. For the same example, in 2013, bananas were priced at \(2 per bunch and coconuts at \)10 per bunch, while in 2014, the prices changed to \(4 per bunch for bananas and \)5 per bunch for coconuts.

To calculate the nominal GDP, we take the product of quantities and prices for each good and sum them up. The increase in quantities or changes in prices will directly affect the nominal GDP, even if the actual output of goods remains the same. This is why it's essential to understand both elements in the computation process.

Economic Growth

Economic growth refers to the increase in the output of goods and services in an economy over a period of time. It is an important indicator of economic health and prosperity. The exercise demonstrates how nominal GDP can change from one year to the next, giving us an insight into the growth of the Tropical Republic's economy between 2013 and 2014.
To gauge economic growth accurately, one can look at changes in nominal GDP. In our example, the nominal GDP increased from \(5600 in 2013 to \)6100 in 2014, an indication of economic growth. However, since nominal GDP does not factor in changes in price levels (inflation or deflation), it might not present the complete picture. For a more accurate measure, economists often use Real GDP, which adjusts for price changes over time, providing a clearer view of the country's economic growth based on actual output.
Understanding these concepts helps in analyzing an economy's performance, setting the stage for more informed decisions by policymakers, business leaders, and investors.