# Consider a simple economy that produces two goods: cupcakes and muffins

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#### Consider a simple economy that produces two goods: cupcakes and muffins

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• 01 Feb, 2019

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The gross domestic product is the value of the goods and services manufactured in the national economy in a particular financial year. In the question, the nominal and the real GDP has been calculated. The nominal GDP is the total value of the output in the economy. Thus, the value of the GDP is calculated at the current market rate of the products.

Whereas, the Real GDP is the real indicator of the growth of the economy, providing the information about the growth in the output of the economy than the previous financial year. To calculate the prices of the products manufactured in the current year, the rates are taken of the base year.

GDP Deflator is the tool to measure the change in the prices of the products or GDP over a period of time. It is the ratio of measuring the output, whether increased or decreased.

In this question, the GDP deflator in the financial year 2013, is 1.00 which is the base year. In the financial year 2014, the GDP deflator is 1.05, showing the increase in the prices of the products.

In year 2015, the deflator rate is 1.44, thus the prices of the product are increasing rapidly.

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