Assume that a small country produces only green peppers and red peppers.Last year,it produced 100 green peppers and 50 red peppers and sold them at prices of $2 per green pepper and $3 per red pepper.This year,it produced 150 green peppers and 60 red peppers and sold them at prices of $2 per green pepper and $4 per red pepper.What is real GDP this year if the base year is last year?
A)$540
B)$400
C)$480
D)$350
E)$890

Question

Quizplus · Accepted Answer

Real GDP is calculated using constant prices from a base year. To calculate real GDP, we need to find the value of production in the current year at base year prices.

Using last year as the base year, the nominal GDP for last year is:

100 green peppers x $2/green pepper + 50 red peppers x $3/red pepper = $350

The nominal GDP for this year is:

150 green peppers x $2/green pepper + 60 red peppers x $4/red pepper = $540

To calculate real GDP, we need to find the value of production in the current year at last year's prices:

100 green peppers x $2/green pepper + 50 red peppers x $3/red pepper = $350

150 green peppers x $2/green pepper + 50 red peppers x $3/red pepper = $450

Real GDP for this year is:

($450 - $350) / $350 x 100% = 28.6% increase

Real GDP = nominal GDP * (100% / GDP deflator)

GDP deflator = (nominal GDP / real GDP) x 100%

Using the above equations,

GDP deflator = ($540 / $480) x 100% = 112.5

Therefore, real GDP this year if the base year is last year is $480.

The correct answer is C.

Assume That a Small Country Produces Only Green Peppers and Red