Suppose that a simple economy produces only four goods and services in 2010: shoes, DVDs, tomatoes, and catsup. Assume one-half of the tomatoes are used in making the catsup and the other of tomatoes are purchased by households. A. What is the nominal GDP

A. To calculate nominal GDP, we need to multiply the quantity of each good by its price and add up the total. Nominal GDP = (40 x 50) + (100 x 25) + (2000 x 1) + (300 x 5) Nominal GDP = 2000 + 2500 + 2000 + 1500 Nominal GDP = $8,000 Therefore, the nominal GDP for this simple economy in 2010 is $8,000. B. In 2011, since all the tomatoes were used in making the catsup, the quantity of tomatoes available for consumption by households is 0. To calculate real GDP, we need to use constant prices from the base year (2010). Real GDP = (40 x 50) + (100 x 25) + (0 x 1) + (300 x 5) Real GDP = 2000 + 2500 + 0 + 1500 Real GDP = $6,000 To calculate GDP deflator, we use the formula: GDP deflator = (Nominal GDP / Real GDP) x 100 GDP deflator = (8,000 / 6,000) x 100 GDP deflator = 133.33 To calculate the rate of inflation, we use the formula: Rate of inflation = ((GDP deflator in year 2 - GDP deflator in year 1) / GDP deflator in year 1) x 100 Rate of inflation = ((133.33 - 100) / 100) x 100 Rate of inflation = 33.33% Therefore, in 2011, the real GDP is $6,000, the GDP deflator is 133.33 and the rate of inflation is 33.33%.