Janet calculated the GDP growth rates for France between 2012 and 2013.Using 2012 prices for both years,GDP increased 5 percent.Using 2013 prices for both years,GDP increased 1 percent.Hence the chained-price method will calculate that between these years,real GDP increased by
A)1 percent.
B)3 percent.
C)5 percent.
D)6 percent.
E)4 percent.

Question

Quizplus · Accepted Answer

The chained-price method takes into account the changes in prices between the two years. So, in the first scenario where 2012 prices are used for both years, the 5% growth includes both real growth and price inflation. In the second scenario where 2013 prices are used for both years, the 1% growth also includes both real growth and price inflation. By using the chained-price method, which adjusts for the difference in prices, we can calculate the real growth rate. To do this, we take the average of the two growth rates ((5%+1%)/2 = 3%) and use it as a base year growth rate. Then we calculate the chained growth rate as [(1+0.01)/(1+0.05)]-1 = -0.038, which means that the real GDP decreased by 3.8% due to the change in prices. Therefore, the real GDP in 2013 is 3% higher than in 2012, which is the answer B.

Janet Calculated the GDP Growth Rates for France Between 2012