Consider an economy that produces only three types of fruit: apples, oranges and
ID: 1239834 • 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: Fruit Quantity Price Apples 3,000 bags $2 per bag Bananas 6,000 bunches $3 per bunch Oranges 8,000 bags $4 per bag In the current year the production and price data are as follows: Fruit Quantity Price Apples 4,000 bags $3 per bag Bananas 14,000 bunches $2 per bunch Oranges 32,000 bags $5 per bag Find nominal GDP in the current year and in the base year. What is the percentage increase since the base year? Find the real GDP in the current year and in the base year. By what percentage docs real GDP increase from the base year to the current year? Find the deflator GDP for the current year and the base year. By what percentage docs the price level change from the base year to the current year? Would you say that percentage increase in nominal GDP in this economy since the base year is due more to increase in prices or increases in the physical volume of output?Explanation / Answer
a) Nominal GDP in current year = 3*4000 + 2*14000 + 5*32000 = 200000 Nominal GDP in base year = 2*3000 + 3*6000 + 4*8000 = 56,000 % increase = (200,000 - 56,000) / 56000 = 257.14 % b) Real GDP in current year = 2*4000 + 3*14000 + 4*32000 = 164000 Real GDP in base year = 2*3000 + 3*6000 + 4*8000 = 56,000 % increase = (164000-56000)/56000 = 192.86 % c) GDP Deflator = Nominal GDP / Real GDP * 100 GDP Deflator for current year = 121.95 GDP Deflator for base year = 100 % increment in price level = 121.95-100 / 100 = 21.95 % d) Due to physical volume of output