Refer to Table 19-23. Suppose that a very simple economy produces three goods: pizzas, haircuts, and backpacks. Suppose the quantities produced and their corresponding prices for 2011 and 2016 are shown in the table above
Use the information to compute real GDP in the year 2011 and 2016. Assume that 2011 is the base year. Is output higher in 2016 or 2011? Why?
Recall that real GDP is found by valuing GDP in a particular year using base year prices. Since 2011 is the base year, real GDP for 2011 is found by multiplying 2011 prices by 2011 quantities and then adding the values up. The individual values for 2011 are calculated in the following table:
Product Quantity Price Value
Pizzas 100 $10 $1,000
Haircuts 50 15 750
Backpacks 200 40 8,000
Therefore, Real GDP for 2011 =
Quantity of pizza in 2011 × price of pizza in 2011 = $1,000
Quantity of haircuts in 2011 × price of haircuts in 2011 = $750
Quantity of backpacks in 2011 × price of backpacks in 2011 = $8,000
Total $9,750.
The individual values for 2016 output and prices in 2011 are calculated in the following table:
Product Quantity Price Value
Pizzas 120 $10 $1,200
Haircuts 45 15 675
Backpacks 210 40 8,400
Therefore, Real GDP for 2016 =
Quantity of pizza in 2016 × price of pizza in 2011 = $1,200
Quantity of haircuts in 2016 × price of haircuts in 2011 = $675
Quantity of backpacks in 2016 × price of backpacks in 2011 = $8,400
Total $10,275.
Since real GDP is a measure of output, and real GDP is higher in 2016 as compared to 2011, output has increased.
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