Utopia produces only two goods: Coke and oil. In 2001 production reached 200 cans of Coke and 170 barrels of oil, with prices equal to 1 and 2 dollars respectively. The forecast for next year is 300 cans of coke and 130 barrels of oil  with an estimated price of 0.5 and 3 dollars respectively. Last, but not least, in order to produce 10 cans of coke one needs 1 barrel of oil.            a) What is the expected percentage change in nominal GDP?            b) What is the expected percentage change in real GDP?            c) What is the expected inflation rate?

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a) Nominal GDP in 2001 is (200 x 1 ) + (170 x 2) = $540. Expected nominal GDP in 2002 is (300 x 0.5) + (130 x 3)  = $540. Hence, there is an expected decline of 0 percent.

b) Using 2001 as the base year, expected 2002 GDP is (300 x 1) + (130 x 2 ) = $560. So expected real GDP growth is 20/540 = 3.7 percent.

c) The expected inflation rate is given by the difference between the expected nominal GDP growth rate and the expected real GDP growth rate. That is, expected inflation is 0 percent - 3.7 percent = - 3.7 percent.

Note that your numbers will be different if you decided to use 2002 prices as the base year.

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