Question

The table below contains data for the country of Dachsland, which produces only pretzels and books. The base year is 2005. Year Price of Pretzels Quantity of Pretzels Price of Books Quantity of Books 2005 2006 2007 2008 $4.00 $4.00 $5.00 $6.00 90 100 120 150 $1.50 $2.00 $2.50 $3.50 150 180 200 200 Dachsland's real GDP grew A. 29.9% from 2005 to 2006. B. 33.3% from 2006 to 2007. C. 24.3% from 2006 to 2007. D. 15.4% from 2007 to 2008.

Answer 1

To calculate real GDP for each year, multiply the quantity of both goods with base year prices (2005)

Now,

Real GDP in 2005= (Price of Pretzels in 2005*Quantity of Pretzels in 2005)*(Price of Books in 2005*Quantity of Books in 2005)

= (4.00*90)+(1.50*150)

= 360+225

= 585

Real GDP in 2006= (Price of Pretzels in 2005*Quantity of Pretzels in 2006)*(Price of Books in 2005*Quantity of Books in 2006)

= (4.00*100)+(1.50*180)

= 400+270

= 670

Real GDP in 2007= (Price of Pretzels in 2005*Quantity of Pretzels in 2007)*(Price of Books in 2005*Quantity of Books in 2007)

= (4.00*120)+(1.50*200)

= 480+300

= 780

Real GDP in 2008= (Price of Pretzels in 2005*Quantity of Pretzels in 2008)*(Price of Books in 2005*Quantity of Books in 2008)

= (4.00*150)+(1.50*200)

= 600+300

= 900

Now,

Change in real GDP from 2005 to 2006 = [(Real GDP in 2006-Real GDP in 2005)/Real GDP in 2005]*100

= [(670-585)/585]*100

= (85/585)*100

= 0.145*100

= 14.5%

So, option A is incorrect.

Change in real GDP from 2006 to 2007= [(Real GDP in 2007-Real GDP in 2006)/Real GDP in 2006]*100

= [(780-670)/670]*100

= (110/670)*100

= 0.164*100

= 16.4%

So, both option B and C are incorrect.

Change in real GDP from 2007 to 2008= [(Real GDP in 2008-Real GDP in 2007)/Real GDP in 2007]*100

= [(900-780)/780]*100

= (120/780)*100

= 0.154*100

= 15.4%

Hence, the correct answer is option D.