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 price index for year 3 is:
A) 120
B) 125
C) 133
D) 150

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 price index for year 3 is:
A) 120 
B) 125 
C) 133 
D) 150

Quizplus · Accepted Answer

To calculate the price index, we need to first determine the nominal GDP and real GDP in year 3 with respect to the base year (year 2).

Nominal GDP in year 3 = Price of good in year 3 x Quantity of output in year 3
= $2 x 3 = $6

Real GDP in year 3 = Price of good in year 2 x Quantity of output in year 3
= $2 x 3 = $6

Therefore, the price index for year 3 with respect to year 2 is:

Price index = (Nominal GDP / Real GDP) x 100
= ($6 / $6) x 100
= 100

However, this is not our final answer since we need the price index in year 3, not with respect to year 2. To adjust for this, we need to multiply the price index with the price index in year 2.

Price index in year 2 = 100

Price index in year 3 = (Price index in year 2) x (Price index with respect to year 2 in year 3)
= 100 x 100/75
= 133.33 (rounded to nearest whole number)
 
Therefore, the price index for year 3 is 133. Answer choice C is correct.

The Table Below Indicates the Price and Output Data Over