Question

Consider a hypothetical economy where only apples and oranges are produced for three years:

	Apples		Oranges
Year	Quantity (Kg.)	Price (Rs. per Kg.)	Quantity (Kg.)	Price (Rs. per Kg.)
2015	10	180	5	200
2016	15	200	12	300
2017	18	250	15	350

Which of the following is/are CORRECT?

• A. Real GDP in the year 2017 (base year = 2016) is Rs. 4,250
• B. Real GDP in the year 2016 (base year = 2015) is Rs. 3,500
• C. Nominal GDP in the year 2015 is Rs. 6,600
• D. Price level, as measured by GDP deflator, increased in 2017 as compared to 2016 (base year = 2016)

Answer 1

The Correct Option is D

Calculating Nominal GDP and GDP Deflator 

Step 1: Calculating Nominal GDP for 2015

The formula for Nominal GDP is:

Nominal GDP = (Quantity of Good 1 × Price of Good 1) + (Quantity of Good 2 × Price of Good 2)

For 2015:

Nominal GDP 2015 = (10 × 180) + (5 × 200)

= 1,800 + 1,000 = 2,800

Step 2: Calculating Real GDP

To determine the GDP deflator, we calculate the real GDP for 2016 and 2017 using 2016 as the base year.

• Real GDP accounts for changes in quantity while keeping prices fixed at base-year levels.
• Comparing price levels between 2016 and 2017, we analyze the changes in price level.

Step 3: Interpreting the GDP Deflator

• If the GDP deflator increases in 2017, it indicates a rise in the price level.
• A higher GDP deflator suggests that the economy experienced inflation between 2016 and 2017.

Conclusion

The GDP deflator helps measure inflation by comparing nominal GDP to real GDP, and an increase in the GDP deflator from 2016 to 2017 suggests a rise in price levels.