The table shows the quantities produced and prices in 2015 and 2016 for an islan

Question

The table shows the quantities produced and prices in 2015 and 2016 for an island economy which produces only mangoes and pineapples The base year is 2016. Calculate real GDP in 2015 and 2016 using the chained dollar method In 2015 Item Mangoes Pineapples Price $8 a box $9 a box Quantity 97 boxes 57 boxes In terms of what dollars is each of these two real GDPs measured? In 2016 Item Mangoes Pineapples Real GDP in 2016 using the chained-dollar method is Price $15 a box S7 a box Quantity 105 boxes 68 boxes

Explanation / Answer

Chained-Dollar Method of Calculating Real GDP-The chained-dollar method does not use the base-year price.The chained-dollar method uses the prices of current year and the preceding year.

Step 1 calculation of nominal n real gdp 2015

qty Price Total

97 * 8 = 776

57 * 9 = 513

Nominal gdp for 2015 (776+513) = 1289..........(x)

2016

price qty total

105 * 15 = 1575

68 * 7 = 476

real gdp total for 2016 (1575+476) = 2015 .......(y)

calculation of gdp of 2015 with 2016 prices

qty Price total

97 * 15 = 1455

57*7 = 399

Real gdp basis 2016 proces Total (1455+399) = 1854......(z)

Calculation of gdp 2016 qty At 2015 prices

Qty. prices total

105 * 8 = 840

68 * 9 = 612

Total (840+612)=1452.....(p)

Step 2 - calculation of production increase

We now need to calculate the increase in production in year 2015 to 2016 with 2015 prices ie between (p) & (x)

1452 - 1289 = 163 so production increased by 163 or 11%

Similarly we now need to calculate the increase the production in year 2015 to 2016 with 2016 proces ie (y)& (z)

2015 - 1854 = 161 or 9%

Step 3 - average of production increase

Average of increase veteran two years 11% n 9% is 9.5%

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