Question

2. Consider an economy that produces only three goods: X, Y and Z.
In the base year, the production and price data were as follows:
Goods
Х
у
Z
Quantity
3000
6000
8000
Price (per unit)
2
3
4
In the current year, the production and price data are as follows:
Goods Quantity Price (per unit)
Х
4000
3
у
14000
2
Z
32000
5
(a) Find nominal GDP in the current year and base year. What is the
percentage increase since the base year?
(b) Find real GDP in the current year and base year. By what percentage
does real GDP increase from the base year to the current year?
(c) Find the GDP deflator for the current year and the base year. By what
percentage does the price level change from the base year to the
current year?
(d) Would you say that the percentage increase in nominal GDP in this
economy since the base year is due more to increases in prices or
increases in the physical volume of output?​

Answer 1

Answer:

order to see how much production has actually increased, we need to extract the effects of higher prices on nominal GDP, so that what we’re left with is real GDP, the increase in the quantity of goods and services produced. This can be easily done using a concept known as the GDP deflator. The GDP deflator is a price index measuring the average price of all goods and services included in the economy. We will explore price indices in detail and how they are computed when we learn more about inflation, but this definition will do for now.

Explanation:

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