Case 4 Tennis Racquets

Calculate real GDP for 2004 and 2005 using 2004 prices. In 2004, there were 110 compact discs sold at $18.00, and 200 tennis racquets sold at $90.00. The nominal gross domestic product (110 compact discs * $18.00 compact disc's pricing for 2004) + (200 tennis racquets * $90.00 tennis racquets pricing for 2004) = 1,980 + 18,000 = $19,980 gross domestic product for 2004 using 2004 prices. The real gross domestic product for 2004 is $19,980. In 2005, there were 120 compact discs sold at $20.00, and 210 tennis racquets sold at $95.00. The nominal gross domestic product (120 compact discs * $20.00 compact disc's pricing for 2005) + (210 tennis racquets * $95.00 tennis racquet's pricing for 2005) = 2,400 + 19,950 = $22,350. The real gross
The gross domestic product (120 compact discs * $18.00 compact disc's pricing for 2004) + (210 tennis racquets * $90.00 tennis racquets pricing for 2004) = 2,160 + 18,900 = $21,060 gross domestic product for 2005 using 2004 prices. "By comparing real GDP and nominal GDP, we can measure the changes in prices for the economy," (O"Sullivan & Sheffrin, 2006). The implicit price gross domestic product deflator in 2005 equals 100 * ($22,350 nominal gross domestic product for 2005 using 2005 prices / $19,980 real gross domestic product for 2005 using 2004 prices) = 100 * 1.12 = 112. The percentage of the increase is [(112-100/100] = 0.12. The price rose by 12%.
Calculate real GDP for 2004 and 2005 using 2005 prices. In 2004, the gross domestic product equals (110 compact discs * $20.00 compact disc's pricing for 2005) + (200 tennis racquets * $95.00 tennis racquet's pricing for 2005) = 2,200 + 19,000 = $21,200 gross domestic product for 2004 using 2005 prices. In 2005, the real gross domestic product equals (120 compact discs * $20.00 compact disc's pricing for (2005) + (210 tennis racquets * $95.00 tennis racquet's pricing for 2005) = 2,400 + 19,950 = $22,350 gross domestic product for 2005 using 2005