Question

Consider an economy that produces only three types of fruit: apples, oranges & bananas.

In the base year the production & price data are as follows:
Fruit      Quantity    Price
Apples 3000 Unit Rs. 2 per unit
Bananas 6000 Unit Rs. 3 per unit
Oranges 8000 Unit Rs. 4 per unit

In the current year the production & price data are as follows:
Fruit     Quantity    Price
Apples 4000 Unit Rs. 3 per unit
Bananas 14,000      Unit Rs. 2 per unit
Oranges 32,000      Unit Rs. 5 per unit

a) Find nominal GDP in the current year & in the base year. What is the percentage increase since base year? 7
b) Find real GDP in the current year & in the base year. By what percentage does a real GDP increase from the base year to current year?
c) Find the GDP deflator for the current year & the base year. By what percentage does the price level change from the base year to current year?

Answer 1

a) Nominal GDP in the Base Year = (3,000 x 2) + (6,000 x 3) + (8,000 x 4)

= 6000 + 18000 + 32000 = Rs. 56000/-

Nominal GDP in the Current Year = (4,000 x 3) + (14,000 x 2) + (32,000 x 5)

= 12,000 + 28000 + 1,60,000 = Rs 2,00,000/-

Percentage increase in Nominal GDP =   

= 257.143%

b) Real GDP in the Base Year = Nominal GDP in the base year = Rs. 56,000

Real GDP in the Current Year = (4,000 x 2) + (14,000 x 3) + (32,000 x 4)

= 8,000 + 42,000 + 1,28,000 = Rs. 1,78,000/-

Percentage increase in Real GDP =

= 217.857%

c)

GDP Deflator in the Base Year = 100%

GDP Deflator in the Current Year

Percentage change in the price level from the base year to current year is given by -

= 12.359% increase in the price level from the base year to the current year.