Question

Suppose an economy produces only apples and oranges and the prices and quantities of each are given in the table below.

Year Price of oranges Quantity of oranges Price of apples Quantity of apples
2010 $2 400 $2 300
2012 $3 800 $4 1200

Assuming that 2012 is the base year, real GDP in 2010 is _____ and nominal GDP in 2010 is _____.

a. $2,400; more than $2,400

b. $4,000; more than $4,000

c. $2,400; less than $2,400

d. $4,000; less than $4,000

e. none of the above

Answer 1

Real GDP in 2010 is $2,400, calculated using base year 2012 prices, and nominal GDP in 2010 is $1,400, calculated using the actual prices from 2010. Hence, the real GDP is $2,400 and the nominal GDP is less than $2,400, making option c the correct answer.

Step-by-step explanation:

When calculating real GDP and nominal GDP, the main difference is that real GDP is adjusted for inflation, using the prices from a base year.

whereas nominal GDP is not. In this scenario, with 2012 as the base year, we calculate the real GDP for 2010 by using the 2012 prices for apples and oranges, and the quantities from 2010. To find the nominal GDP for 2010, we multiply the 2010 prices by the 2010 quantities and sum these amounts.

The calculation for real GDP in 2010 would be: (400 oranges * $3) + (300 apples * $4) = $1200 + $1200 = $2400. The calculation for nominal GDP in 2010 would be: (400 oranges * $2) + (300 apples * $2) = $800 + $600 = $1400. Therefore, the real GDP in 2010 is $2,400 and nominal GDP in 2010 is less than $2,400.

As a result, the correct answer to the question is: Real GDP in 2010 is $2,400 and nominal GDP in 2010 is less than $2,400, making option c correct.