Consider the following data for a hypothetical economy that produces two goods, milk and honey.

a. Compute nominal GDP for each year in this economy.

b. Using year 1 as the base year, compute real GDP for each year. What is the percentage change in real GDP from year 1 to year 2 ?

c. Using year 1 as the base year, compute the GDP deflator for each year. What is the percentage change in the GDP deflator from year 1 to year 2 ?

d. Now compute the GDP deflator for each year, using year 2 as the base year.

e. Explain why the measures of real GDP growth (and growth in the deflator) depend on the choice of base year.

Transcribed Image Text:

Quantity Produced Prices Milk Honey Milk Honey (litres) (kg) ($/litre) ($/kg) Year 1 100 40 2 6 Year 2 120 25 3 6