Question

Please explain this GDP question; why is it 200 and not 20???

34. Suppose that nominal GDP is $600 billion and real GDP is S30 billion. What is the GDP price deflator? Don't forget that the GDP price deflator is an index! A 50 B 5 C 20 D 200

Answer 1

Hi, to do away with your doubt as to why the GDP deflator is 200 and not 20, I will solve it for you. I looked at all the possible formulas that could be used in calculating GDP deflator, however, the answer that I got was 2000 and not 200 (or 20). 2000 is not present in the options.

GDP Deflator = (Nominal GDP*100)/Real GDP
= ($600,000,000,000* 100)/$30,000,000,000
= 2000

GDP Deflator is the ratio of current prices to base year prices. Therefore, GDP Deflator of 2000 means that if we take the price to be 100 then our current prices have become 20 times of the base price. Hope this helps.

So, I would suggest you to have a relook at the figures once.