Chapter 5, Problem 3E

To determine

(a)

	Year 1	Year 2
	Quantity	Price	Quantity	Price
Oranges	100	$5	150	$5
Pears	100	$3	75	$4

The growth rate of constant-dollar real GDP with Year 1 as base.

Answer to Problem 3E

The growth rate of constant dollar GDP is negative 3.21% with year 1 as the base price.

Explanation of Solution

	Year 1	Year 2	Year 1	Year 2
	Quantity	Price	Quantity	Price	Value of goods with Year 1 as base	Value of goods with Year 1 as base
Oranges	100	$5	150	$5	$500	$750
Pears	100	$3	75	$4	$300	$225
Total					$800	$775

The growth rate of GDP from Year 1to Year 2 is given by:

Growth Rate of GDP = $\frac{\text{(GDP Year 2 – GDP Year 1)}}{\text{GDP Year 1}}\times 100$

Growth Rate of GDP = $\frac{\text{(775 – 800)}}{800}\times 100$

Growth Rate of GDP = $\frac{\text{(25)}}{800}\times 100$ = -3.125%

Economics Concept Introduction

Constant dollar real GDP - The nominal GDP adjusted for the inflation which reflects the value of all services and goods produced within the country in a year expressed in base year price.

To determine

(b)

	Year 1	Year 2
	Quantity	Price	Quantity	Price
Oranges	100	$5	150	$5
Pears	100	$3	75	$4

The growth rate of constant-dollar real GDP with Year 2 as base.

Answer to Problem 3E

The growth rate of constant dollar GDP with year 2 as base price is 16.67%.

Explanation of Solution

	Year 1	Year 2	Year 1	Year 2
	Quantity	Price	Quantity	Price	Value of goods with Year 2 as base	Value of goods with Year 2 as base
Oranges	100	$5	150	$5	$500	$750
Pears	100	$3	75	$4	$400	$300
Total					$900	$1050

The growth rate of GDP from Year 1to Year 2 is given by

Growth Rate of GDP = $\frac{\text{(GDP Year 2 – GDP Year 1)}}{\text{GDP Year 1}}\times 100$

Growth Rate of GDP = $\frac{\text{(1050 – 900)}}{900}\times 100$

Growth Rate of GDP = $\frac{\text{150}}{900}\times 100$ = 16.67%

Economics Concept Introduction

Constant dollar real GDP - The nominal GDP adjusted for the inflation which reflects the value of all goods and services produced within the country in a year expressed in base year price.