Using the chained-dollar method to calculated real GDP, real GDP is calculated by
A) valuing the current output at last year's real GDP prices.
B) valuing the current output at current year prices.
C) averaging the growth of output from one year to the next when the growth rates are calculated using this year's prices and using last year's prices.
D) either A or C, depending which gives the larger value for real GDP.
E) averaging the value of current output valued using base year prices and current output valued using current year prices.

Question

Quizplus · Accepted Answer

The chained-dollar method takes into account changes in prices from year to year by using both last year's prices and current year's prices to calculate the growth rate. This results in a more accurate measurement of real GDP. Option A only uses last year's prices and may not accurately reflect changes in prices over time. Option B would result in nominal GDP, not real GDP. Option D is not a valid option as the method used should not depend on which one gives a larger value. Option E is incorrect as averaging values from different price levels does not give a true measure of output growth.

Using the Chained-Dollar Method to Calculated Real GDP, Real GDP