Question

Suppose that in 1984 the total output in a single-good economy was 10,000 buckets of chicken. Also assume that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2005 the price per bucket of chicken was $16 and that 22,000 buckets were produced.

Required:
a. What is the GDP price index for 1994, using 2005 as the base year?
b. By what percentage did the price level, as measured by this index rise between 1984 and 2005?
c. What were the amounts of real GDP in 1984 and 2005?

Answer 1

Answer:

a. 62.5

b. 60%

c. $160,000; $352,000

Explanation:

a. Price Index = (Price in year of interest/ Price in Base year) * 100

= (10/16) * 100

= 62.5

b. Rose from 62.5 in 1984 to 100 in 2005

= (100 - 62.5)/62.5

= 60%

c. Using 2005 as the Base year means that the Real GDP will be based on 2005 prices.

Real GDP 1984

= 10,000 buckets * 16

= $160,000

Real GDP 2005

= 22,000 * 16

= $352,000