For the following questions, suppose an economy produces only food and clothing, and that price and quantity data are given in the table below.

-The base year matters for the computation of real GDP because
A) otherwise we cannot compute growth rates.
B) relative prices can change over time.
C) it allows an international comparison of GDP.
D) it establishes a target for macroeconomic policy.

Question

For the following questions, suppose an economy produces only food and clothing, and that price and quantity data are given in the table below.

-The base year matters for the computation of real GDP because
A) otherwise we cannot compute growth rates. 
B) relative prices can change over time. 
C) it allows an international comparison of GDP. 
D) it establishes a target for macroeconomic policy.

Quizplus · Accepted Answer

Real GDP is computed in terms of constant prices of a base year which allows for comparisons over time. If we do not use a base year, changes in relative prices over time can distort the calculation of changes in real output.

For the Following Questions, Suppose an Economy Produces Only Food