Interactive Graphing Exercise

Extending the Text

The exercise below provides additional practice with measuring real and nominal GDP.

Instructions:
1) Use the mouse to click on any of the boldfaced price or quantity cells. Change the number in the highlighted gray area to a new value.

Note:
Prices must range between $0.00 and $10.00
Quantities range between 0 and 400 units

2) Press Reset to start over.

The pop-up shows the prices and quantities of apples and bread produced in an economy during two different years. Assume that these are the only goods produced in this economy. Note that initially the prices and quantities produced of the goods are identical in both years. Now, double the prices and quantities produced for each of the goods in year 2.

What happens to nominal and real GDP in year 2 and the growth rates of nominal and real GDP between the two years? Why is the growth rate of nominal GDP greater than the growth rate of real GDP between the two years?

To begin, reset the interactive pop-up to its initial values by clicking on the Reset button. Now double the quantities produced for each of the goods in year 2. What happens to nominal and real GDP in year 2 and the growth rates of nominal and real GDP between the two years?

Again, reset the interactive pop-up to its initial values by clicking on the Reset button. This time, double the prices for each of the goods in year 2. What happens to nominal and real GDP in year 2 and the growth rates of nominal and real GDP between the two years?

Based on your analysis in this exercise, which is the better measure of economic activity, real GDP or nominal GDP? Why?

Your Results:

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