Question

Assume that Greece only makes feta cheese. In 2010, Greece made 100 ounces of feta that were sold for $2 each. In 2012 , Greece made 200 ounces of feta that were sold for $4 each. In 2014, Greece made 140 ounces of feta that were sold for $6 each. The base year is selected to be 2010. Calculate GDP deflator for 2014 .

Answer 1

The GDP deflator for 2014 is calculated as (Nominal GDP / Real GDP) × 100. With a nominal GDP of $840 and real GDP of $280 in 2014, the GDP deflator is 300, showing a tripling of prices since 2010.

Step-by-step explanation:

To calculate the GDP deflator for 2014, we first need to compute the nominal and real GDP for that year. Nominal GDP is calculated by multiplying the current year's quantity of goods produced by the current year's price. Real GDP is calculated by multiplying the current year's quantity by the base year's price.

For 2014, the nominal GDP is 140 ounces of feta × $6 per ounce = $840. The real GDP, however, is calculated using the 2010 price: 140 ounces × $2 per ounce (base year price) = $280.

The GDP deflator is a ratio that compares the nominal GDP to the real GDP and is used to measure the level of prices in the economy for a given year relative to the base year. It is calculated as follows: (Nominal GDP / Real GDP) × 100. Using our numbers: ($840 / $280) × 100 = 300.

Therefore, the GDP deflator for Greece in 2014 is 300, indicating prices have on average tripled since the base year 2010.