Imagine an Economy That Produces Only Pizza and Pretzels

Essay

Imagine an economy that produces only pizza and pretzels. In 2010, the price of pizza was $20 and the price of pretzels was $1. In 2011, the price of pizza is $22 and the price of pretzels is $1.10. If 100,000 pizzas and 1,000,000 pretzels were produced in 2010, and 110,000 pizzas and 1,100,000 pretzels are produced in 2011, what is the nominal GDP and real GDP (using 2010 prices) for this economy in 2010 and 2011? Calculate the growth rate of real GDP for this economy during this period. Why is the growth rate of real GDP different than the growth rate of nominal GDP over this period? Can you use the GDP data to calculate the inflation rate from 2010 to 2011?