For the following question(s), suppose an economy produces only pens and pencils, and that the quantity and price data is given by this table:

-What is the real GDP in year 1 using base year 2?
A) $418
B) $300
C) $360
D) $338
E) $294

Question

For the following question(s), suppose an economy produces only pens and pencils, and that the quantity and price data is given by this table:
 
-What is the real GDP in year 1 using base year 2?
A) $418 
B) $300 
C) $360 
D) $338 
E) $294

Quizplus · Accepted Answer

To calculate real GDP using base year 2, we need to multiply the quantity produced in year 1 with the year 2 prices. 
For year 1 and pens: $2 x 100 = $200
For year 1 and pencils: $1 x 120 = $120
Using base year 2 prices - $3 for pens and $2 for pencils
For year 1 and pens: $3 x 100 = $300
For year 1 and pencils: $2 x 120 = $240
Therefore, the real GDP in year 1 using base year 2 is $540 ($300 + $240). But we need it in base year 2 dollars, so we divide by the price index (using base year 2 prices) which is (3x100 + 2x120)/ (3+2) = 116. We get $360 ($540/116) as the answer, so the best choice is C.

For the Following Question(s), Suppose an Economy Produces Only Pens