Economic growth — practice questions

(a) Calculate Real GDP for 2023

Formula: Real GDP = (Nominal GDP / GDP Deflator) × 100

Step 1: Find Real GDP for the base year (2022). Real GDP 2022 = ($500bn / 100) \times 100 = **$500 billion** (In the base year, real GDP equals nominal GDP).

Step 2: Calculate Real GDP for 2023. Real GDP 2023 = ($550bn / 105) \times 100 = **$523.81 billion** (approx.)

(b) Calculate Real Economic Growth Rate

Formula: Real Growth Rate = ((Real GDP 2023 - Real GDP 2022) / Real GDP 2022) × 100

Real Growth Rate = (($523.81bn -$500bn) / $500bn) \times 100$ = ($23.81bn /$500bn) × 100 = 4.76%

(c) Calculate Nominal Growth Rate and Explain Difference

Formula: Nominal Growth Rate = ((Nominal GDP 2023 - Nominal GDP 2022) / Nominal GDP 2022) × 100

Nominal Growth Rate = (($550bn -$500bn) / $500bn) \times 100$ = ($50bn /$500bn) × 100 = 10%

Explanation: The nominal growth rate (10%) is significantly higher than the real growth rate (4.76%). This is because nominal GDP is measured at current prices and includes the effect of inflation. The GDP deflator increased by 5%, indicating inflation. Real GDP growth strips out this price effect to show the true increase in the volume of goods and services produced.

(a) Actual growth rate = ((2.12 − 2.0) ÷ 2.0) × 100 = 6.0%

(b) Potential growth rate = ((2.15 − 2.05) ÷ 2.05) × 100 = 4.88% (≈ 4.9%)

(c) Output gap 2024 Actual Y ($2.12tn) < Yf ($2.15tn) → negative output gap of $0.03tn$

Implication: economy is below full capacity — likely cyclical unemployment and scope for expansionary policy without much inflation.