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2013?2018?ProductQuantityPriceQuantityPricePizzas100$10120$12Haircuts50154520Backpacks2004021045 Refer to Table 19-23
2013?2018?ProductQuantityPriceQuantityPricePizzas100$10120$12Haircuts50154520Backpacks2004021045
Refer to Table 19-23. Suppose that a very simple economy produces three goods: pizzas, haircuts, and backpacks. Suppose that the quantities produced and their corresponding prices for 2013 and 2018 are shown in the table above. Use the information to compute the real GDP in the year 2013 and 2018. Calculate the real GDP in 2018 assuming the base year is 2013. Do the same calculation assuming the base year is 2018. Are the calculations different? Why?
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Expert Solution
Computation of Real GDP:
Real GDP = Base Year Prices * Current Year Quantities
1) Assuming Base Year is 2013:
Real GDP2013 = 100*$10 + 50*$15 + 200*$40 = $9,750
Real GDP2018 = 120*$10 + 45*$15 + 210*$40 = $10,275
2) Assuming Base Year is 2018:
Real GDP2013 = 100*$12 + 50*$20 + 200*$45 = $11,200
Real GDP2018 = 120*$12 + 45*$20 + 210*$45 = $11,790
Real GDP expresses the value of goods based on base year. The economy changes with time, So, the prices of such quantities also change as seen in the question. Floods, drought, availability in international markets can all affect the prices of commodities. So countries usually change the base years every few years.
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