Discuss the nature and function of a price index, and describe the difference between nominal and real GDP, by answering the following questions:
1. Assume that nominal GDP for 2012 was $700B with a price index of 110 (using 2004 as the base year). What is the real GDP for 2012?
Remember: To compute the real GDP for any given year use this forrmula: Real GDP = Nominal GDP/Price Index x 100
2. Assume that nominal GDP for 2013 was $850B with a price index of 140 (using 2004 as the base year). What is the Real GDP for 2013?
Remember the fromula :Real GDP = Nominal GDP/Price Index x 100
3. Did real GDP increase or decrease from 2012 to 2013? If it decreased, explain why? Compare your answers form question (1) and (2) above and answer question (3).
4. Why do economists use real GDP, rather than nominal GDP, to measure economic growth?