Answer to Question #198418 in Macroeconomics for eddy

Question

(a) If year 2 is the base year, give the price index for year 3.

                 (b) Give the nominal GDP for year 4. $120

                 (c) What is the real GDP for year 4?

                 (d) Tell which years you would deflate nominal GDP and which years you would inflate nominal GDP in finding real GDP.

Answer 1

Solution:

a.). Price index for year 3 = $\frac{Price\; of\; the\; market\; basket\; in \; current \; year}{Price\; of\; the\; market\; basket\; in \; base \; year} \times 100$

Assume:

Price of the market basket in year 3 = 120

Price of the market basket in year 2 = 90

Price index for year 3 = $\frac{120}{90}\times 100 = 133.33\%$

 

b.). Nominal GDP = Current year quantity output x current year market price

Assume:

Current year output = 150

Nominal GDP = 150 $\times$ 120 = 18,000

 

c.). Real GDP = Current year quantity output x base year market price

Assume:

Base year market price = 100

Real GDP for year 4 = 150 $\times$ 100 = 15,000

 

d.). The year that would deflate nominal GDP is year 2, while the year that would inflate nominal GDP in finding real GDP is year 3.