An economy produces two goods, food and clothing

Measuring Real and Nominal GDP and Prices

EXAMPLE: An economy produces two goods, food and clothing. A typical household consumes 50 units of food and 20 units of clothing per year. Prices are given below for 1992 and 1997. The base year is 1992.

	1992 Price	1992 Output	1997 Price	1997 Output
Food	$2	5000	$3	6000
Clothing	$10	1000	$12	2000

Fill in the values in the following table.

Nominal GDP measures the value of all final goods and services purchased for a period of a year, valued at current prices. It's the rate at which people actually spent money on final goods and services. In the example, in 1992 people spent $10,000 on food (5000 units at $2 each) and $10,000 on clothing. In 1997 they spent $18,000 on food and $24,000 on clothing.
Real GDP measures the value of all final goods and services purchased for a period of a year, valued at prices that don't change from year to year. We choose a base year and use those prices to value output every year, so the only thing that changes is output itself. Real GDP is the rate at which people would have money on the final goods and services that they actually bought if prices hadn't changed since the base year. In the example, in 1992 people bought $10,000 worth of food (5000 units at $2 each) and $10,000 worth of clothing. Real and nominal GDP are the same because 1992 is the base year. In 1997 they bought $12,000 worth of food and $20,000 worth of clothing, valued at base year prices. (They paid more, but that's how much the goods and services they bought would have been worth in the base year.)
The GDP Price Index for any year is [nominal GDP/real GDP] times 100. It's used to deflate nominal GDP; if you divide nominal GDP by the GDPPI, you get real GDP.
Inflation is the percentage increase in the Price Index during a period of time. Real economic growth is the percentage increase in Real GDP.

	1992	1997
Nominal GDP	$20,000	$42,000
Real GDP	$20,000	$32,000
GDP Price Index (GDP Deflator)	100	131.25
Inflation (Based on GDP deflator) from 1992 to 1997	XXXXXXXXXXXXX XXXXXXXXXXXXX	31.25%
Real Growth (%)from 1992 to 1997	XXXXXXXXXXXXX XXXXXXXXXXXXX	60%
Now assume the typical consumer purchases a market basket of 50 units of food and 20 units of clothing per year. Calculate the consumer price index and the rate of inflation based on it.
Cost of living	$300	$390
Consumer Price Index (CPI)	100	130
Inflation (Based on CPI)	XXXXXXXXXXXXX XXXXXXXXXXXXX	30%

The Consumer Price Index (CPI) tracks increases in the cost of living. For purposes of calculating the CPI, the cost of living is defined as the cost of purchasing a fixed set of goods and services (a representative market basket) at current prices. Since the set of goods and services remains the same, the only thing that changes over time is the prices. The cost of living is assigned an index number of 100 in the base year. The CPI for all other years is calculated as [current cost of living/base year cost of living] (times 100). Inflation is the percentage increase in the Price Index during a period of time.