Consider an economy that produces only three types of fruit: apples, oranges, an
ID: 1216606 • Letter: C
Question
Consider an economy that produces only three types of fruit: apples, oranges, and bananas. In the base year (a few years ago), the production and price data were as follows: The Measurement and Structure of the National Economy 5 7 Fruit Apples Bananas Oranges Quantity 3000 bags 6000 bunches 8000 bags Price $2 per bag $3 per bunch $4 per bag In the current year the production and price data are as follows: Fruit Apples Bananas Oranges Quantity 4000 bags 14,000 bunches 32,000 bags Price $3 per bag $2 per bunch $5 per bag a. b. c. d. Find nominal GDP in the current year and in the base year. What is the percentage increase since the base year? Find real GDP in the current year and in the base year. By what percentage does real GDP increase from the base year to the current year? 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? 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?
Explanation / Answer
a.
Base year = GDP = ( 2)(3000)+(3)(6000)+(4)(8000)= 56,000
Current year = ( 3)(4,000) + (2)(14,000)+ (5)(32,000)= 200,000
Percentage increase =((200,000-56,000)/ 56,000)*(100) = 257.14%
b.
Real base = 56,000
Current =(2)(4000) + ( 3)(14,000) ( 4)(32,000)= 178,000
Percentage increase = ((178,000 - 56,000) / 56,000)*100 = 218%
c.
The GDP deflator is the ratio of nominal GDP to real GDP. In the base year, nominal GDP equals real GDP, so the GDP deflator is 1. In the current year, the GDP deflator is $200 000 / $178 000 = 1.124. Thus the GDP deflator changes by [(1.124 / 1) 1] x 100% = 12.4% from the base year to the current year.
d.
Nominal GDP rose 257%, prices rose 12.4%, and real GDP rose 218%, so most of the increase in nominal GDP is because of the increase in real output, not prices