Question

Let's say that our country produces only bread and apples (both final goods). In year 1, we produce 10 loaves of bread at $3 each, and 20 apples at $1 each. In year 2, we produce 8 loaves of bread at $2 each, and 25 apples at $1.25 each. Using year 1 as the base year (for constant prices), what is real GDP in year 1 and real GDP in year 2?

Answer 1

Year 1 Real GDP = $50

Year 2 Real GDP = $49

Step-by-step explanation:

Real GDP expresses the value of all goods and services produced in an economy in a given year, expressed in base year prices.

In Year 1:

Bread: 10 loaves x $3 = $30

Apples: 20 apples x $1 = $20

Real GDP in Year 1: $30 + $20 = $50

In Year 2:

Bread: 8 loaves x $3 = $24

Apples: 25 apples x $1 = $25

Real GDP in Year 2 = $24 + $25 = $49

Note that in Year 2, although we use the quantities from Year 2, we use prices from the base year (Year 1).