Assume that between 1998 and 2008, nominal GDP increased from $7 trillion to $12 trillion and that the price index rose from 100 to 133.3. Which of the following expresses GDP for 2008 in terms of 1998 prices?
A) $7.5 trillion
B) $9.0 trillion
C) $9.5 trillion
D) $16.0 trillion

Question

Quizplus · Accepted Answer

To calculate GDP in terms of 1998 prices, we need to use the GDP deflator, which is the ratio of nominal GDP to real GDP (measured in constant 1998 dollars). Using the formula for the GDP deflator:
GDP deflator in 1998 = (Nominal GDP / Real GDP) x 100
100 = (7 trillion / Real GDP in 1998) x 100
Real GDP in 1998 = 7 trillion / 100 = $7 trillion

GDP deflator in 2008 = (12 trillion / Real GDP in 2008) x 100
133.3 = (12 trillion / Real GDP in 2008) x 100
Real GDP in 2008 = 12 trillion / (133.3/100) = $9 trillion

To express GDP in 2008 dollars in terms of 1998 prices, we need to adjust for changes in the price level by dividing nominal GDP (measured in current 2008 dollars) by the GDP deflator in 2008 (133.3) and multiplying by the GDP deflator in 1998 (100):
GDP in 1998 prices = (Nominal GDP / GDP deflator in 2008) x GDP deflator in 1998
GDP in 1998 prices = (12 trillion / 133.3) x 100 = $9 trillion, which is the same as real GDP in 2008.

Assume That Between 1998 and 2008, Nominal GDP Increased from $7