2005 tity Price Product 2012 2013 tity Price Hamburgers | 20-350 S2 S0.80 Textbo

Question

2005 tity Price Product 2012 2013 tity Price Hamburgers | 20-350 S2 S0.80 Textbooks 90 00 sou 1 100 50 800 S65 S2.25 120 Shirts Cotton 50 100 $30100 $2 0.60$25 120 S0.70 la. Use the information in the table to calculate real GDP for 2012 and 2013, using that the base year is 2005. lb. What is the growth rate of real GDP during 2012 and 2013? Ic. Between 2012 and 2013 which year has the largest percentage increase in the price level, as measured by changes in the GDP deflator (using 2005 as the base year)? Briefly explain.

Explanation / Answer

1. A.

To calculate the real GDP, prices of the base year, will be used in calculation.

Real GDP in 2012 = 50*100 + 2*100 + 30*50 + .8*800 = $7340

Real GDP in 2013 = 50*100 + 2*120 + 30*65 + .8*120 = $7286

1. B.

Real GDP growth rate between 2012 and 2013 = (7286-7340)/ 7340

Real GDP growth rate between 2012 and 2013 = -.736% or -.74%

1. C.

Nominal GDP in 2012 = 60*100 + 2*100 + 25*50 + .6*800 = $7930

Nominal GDP in 2013 = 65*100 + 2.25*120 + 25*65 + .7*120 = $8479

So,

GDP deflator in 2005 = 100

GDP deflator in 2012 = (7930/7340)*100 = 108.04

GDP deflator in 2013 = (8479/7286)*100 = 116.37

So,

% increase in price in 2012 = (108.04-100)/100 = 8.04%

% increase in price in 2013 = (116.37-100)/100 = 16.37%

The size of GDP deflator in 2013 is bigger than that of 2012 and as per the above calculations, the % rise in price in 2013 is bigger than that of 2012 when base year is used to compute the % change in price.

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