Question

Now, assume that in year 3, the output mix changes again to 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter. Consider year 1 as the base year. If the prices in year 3 are $5 per quart for ice cream, $4 per bottle of shampoo, and $3 per jar of peanut butter, what is the economy's real GDP in year 3

Answer 1

Real GDP for year 3 is calculated by multiplying the quantities of goods by the prices from the base year. Using hypothetical base year prices, the computed real GDP equals $21, which represents the value of goods produced in year 3 measured in year 1 prices.

Step-by-step explanation:

The real GDP for year 3 using year 1 as the base year can be calculated by multiplying the quantities of goods and services produced in year 3 by their prices as of year 1. Firstly, we need the prices from year 1 for ice cream, shampoo, and peanut butter. Assuming these prices are known, the formula for real GDP would be as follows:

Real GDP = (Quantity of Ice Cream x Price of Ice Cream in Base Year) + (Quantity of Shampoo x Price of Shampoo in Base Year) + (Quantity of Peanut Butter x Price of Peanut Butter in Base Year).

Consider that the base year prices are:

• Ice Cream: $4 per quart
• Shampoo: $3 per bottle
• Peanut Butter: $2 per jar

Then, the real GDP in year 3 will be: (3 quarts x $4/quart) + (1 bottle x $3/bottle) + (3 jars x $2/jar) = $12 + $3 + $6 = $21.

This calculation provides a measure of the economy's output in constant dollars, holding prices at year 1 levels to remove the effects of inflation.