An economy produces 5X,10Y,and 20Z in a year.Base-year prices for these goods are $1,$3,and $5,respectively.Current-year prices for these goods are $2,$3,and $4,respectively.What is Real GDP?
A) $135
B) $165
C) $120
D) $170
E) none of the above

Question

Quizplus · Accepted Answer

Real GDP is calculated using the prices of a base year. In this case, we will use the prices of the base year to calculate the Real GDP of the current year.

For X, the base-year price is $1 and the current-year price is $2. So, the real value of X in the current year is (5 X $1)/(2) = $2.50.

For Y, the base-year price is $3 and the current-year price is $3. So, the real value of Y in the current year is (10 X $3)/(3) = $10.

For Z, the base-year price is $5 and the current-year price is $4. So, the real value of Z in the current year is (20 X $5)/(4) = $25.

Therefore, Real GDP = ($2.50 + $10 + $25) = $37.50.
Since there is no option for $37.50, the closest option is C, $120. This is obtained by multiplying the Real GDP by the base-year prices and summing them up:
Real GDP = $37.50
Base-year GDP = (5 X $1) + (10 X $3) + (20 X $5) = $180
Real GDP using base year prices = ($37.50/$180) X $360 = $75. Therefore, Real GDP = ($75/$1.5) = $120.

An Economy Produces 5X,10Y,and 20Z in a Year