Question

III 6. Assume that apples cost $0.50 in 2002 and $1 in 2007, whereas oranges cost $1 in 2002 and $1.50 in 2007. 4 apples were produced in 2002 and 5 in 2007, whereas 3 oranges were produced in 2002 and 5 in 2007. Calculate the GDP deflator in 2007, using 2002 as the base year. Numerical V

Answer 1

Solution:

Cost of apple in 2002 = $0.50

Cost of apple in 2007 = $1

Cost of oranges in 2002 = $1

Cost of oranges in 2007 = $1.50

Nominal GDP = Value of all final goods, economy produced at 2007

= 1*5+1.5*5

= 5+ 7.5

= 12.5

Real GDP = GDP calculated using base year pricing (2002)

= 0.5*5 + 1*5

= 2.5 + 5

=7.5

GDP deflator = (Nomianl GDP/ Real GDP) * 100

= (12.5/7.5) *100

= 166.67

Therefore GDP deflator in 2007, using 2002 as the base year is 166.67