Table 4.20 A very simple economy produces three goods: cameras, legal services, and books.The quantities produced and their corresponding prices for 2007 and 2017 are shown in the table above.
-Refer to Table 4.20.What is the GDP deflator in 2017 if 2017 is the base year?

Question

Table 4.20  A very simple economy produces three goods: cameras, legal services, and books.The quantities produced and their corresponding prices for 2007 and 2017 are shown in the table above.
-Refer to Table 4.20.What is the GDP deflator in 2017 if 2017 is the base year?

Quizplus · Accepted Answer

The GDP deflator is calculated as follows: 
GDP deflator = (Nominal GDP / Real GDP) * 100

2017 is the base year, so the real GDP is equal to the nominal GDP in 2017. 
Real GDP in 2017 = $66,000 + $30,000 + $24,000 = $120,000

Nominal GDP in 2017 = $70,000 + $35,000 + $28,000 = $133,000

GDP deflator in 2017 = (133,000 / 120,000) * 100 = 110.83

To put it into a base of 100, we divide by 1.1083.

GDP deflator in 2017 (base year 2017) = (110.83 / 1.1083) * 100 = 100

Therefore, the best choice is C, with an explanation that we divide the calculated GDP deflator in 2017 by itself to get a value of 100, which is the base year.

Table 420 a Very Simple Economy Produces Three Goods: Cameras