The Commerce department announced that it is shifting from 1987 to 1992 as the b

Question

The Commerce department announced that it is shifting from 1987 to 1992 as the base year for calculating the nation's real GDP and price index. The new figures will account for changes in consumers' tastes, technological advances, and other phenomena. a. in the new official figures, will the number for real GDP for 1087 become larger, smaller, or stay the same as it was before the base was changed to 1992? b.In the new official figures, will the 1992 real GDP number be larger, smaller or stay the same as the 1992 nominal GDP? c. what will the new 1992 price index number be? d. will the new 1987 price index number be larger, smaller, or stay the same as it was before? e. The clipping claims that consumer tastes and technological advances will be accounted for. How would this accounting be done?

Explanation / Answer

A) Real GDP will reamain same.As real GDP is calculated from current prices.It is not effected by base year. B) Real GDP = Nominal GDP - Inflation. So real GDP is less than nominal GDP C) Price index = [(Pt * Qt)/ (P0 * Qt)] *100 since new base year is 1992 .So, Pt = P0 .So, price index is 100 D) Price index is smaller when base year is changed to 1992.As due to inflation prices of base year rises.Therefore, denominator becomes larege now .So, price index decreases. E) Basket of quantity which is taken Qt will now be changed as consumer's taste ,technology is now taken in to account

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