The table below indicates the price and output data over a five-year period for an economy that produces only one good. Refer to the above data.If year 2 is the base year, the percentage increase in real GDP from year 2 to year 4 is:
A)40 percent.
B)60 percent.
C)100 percent.
D)80 percent.

Question

The table below indicates the price and output data over a five-year period for an economy that produces only one good.  Refer to the above data.If year 2 is the base year, the percentage increase in real GDP from year 2 to year 4 is:
A)40 percent. 
B)60 percent. 
C)100 percent. 
D)80 percent.

Quizplus · Accepted Answer

To calculate real GDP, we need to use the prices from the base year. In this case, year 2 is the base year with a price of $5 per unit. 
Real GDP in year 2: 100 units x $5 = $500 
Real GDP in year 4: 150 units x $7 = $1050

Therefore, the percentage increase in real GDP from year 2 to year 4 is ((1050-500)/500) x 100 = 100 percent, which is option C. However, these are nominal values. The real GDP increase of this economy is ((150*5)-(100*5))/(100*5) * 100 = 50%. The base year 2's GDP is 100*5 = 500 (inflation adjusted). The GDP in year 4 is 150*5 = 750 (which is the nominal value). If we adjust this value with the inflation rate, we can get the real value of this GDP which is 750-50% of 750 = 375. The percentage increase of the real GDP is ((375-500)/500) x 100 = 80%, which is option D.

The Table Below Indicates the Price and Output Data Over