Question

Recall the method of calculating real GDP detailed in the chapter. As you may already have noticed, this method has a problem: in calculating aggregate output, this method weights the output of the various goods and services by their relative prices in the base year.

Say, for example, a textbook costs $100 in the base year, and a laptop costs $2,000. This means that the laptop would have 20 times the weight of a book in calculating aggregate output.

But what happens when relative prices change? As you know, the prices of most high-tech items, including laptops, have generally been decreasing over time. Suppose the price of a laptop declined from $2,000 to $1,000 in the period from the base year to the current year. Now, a laptop costs only 10 times as much as the book. So, using base-year relative prices would overweight laptops in calculating real GDP in the current year.

In response to this problem, in 1996 the BEA switched to what is called a chain-weighted method of calculating real GDP. Say the base year is 2008. To calculate the growth rate of real GDP between 2008 and 2009, for example, the BEA calculates real GDP for 2008 using 2008 as the base, and then real GDP for 2008 using 2009 as the base. Then, the bureau calculates real GDP for 2009 using 2009 as the base, and real GDP for 2009 using 2008 as the base. For each base, the growth rate is then calculated as:

2009 GDP(2008 Base)−2008 GDP(2008 Base)2008 GDP(2008 Base)   

and   2009 GDP(2009 Base)−2008 GDP(2009 Base)2008 GDP(2009 Base)

So, they end up with two different growth rates, which are then averaged. Given this averaged growth rate, and the level of GDP in 2008 at 2008 prices, the bureau then calculates real GDP for 2009 as one plus the average growth rate previously calculated, times 2008 output in 2008 dollars. The growth rate between 2009 and 2010 is then calculated similarly.  

Suppose that laptops, economics textbooks, and energy drinks are the only three goods produced in the United States. The following table gives the quantity of each produced (in millions) and their price in the years from 2010 to 2012:

	Laptops				Textbooks				Energy Drinks
	Price		Quantity		Price		Quantity		Price		Quantity
2010	$1,800		6		$160		7		$3		25
2011	$1,500		8		$170		9		$5		30
2012	$1,300		8		$190		10		$5		35

Complete the following table by calculating nominal GDP and real GDP (using 2010 as the base year) for each year.

(Enter

your responses as

integers.)

	Nominal GDP	Real GDP(2010 Base)
2010	$	$
2011	$	$
2012	$	$

Using the chain-weighted method outlined above, real GDP for 2011 is

$.

(Round

your response to the nearest

dollar.)

Using the chain-weighted method again, real GDP for 2012 is

$.

(Round

your response to the nearest

dollar.)