Use the formula for the GDP deflator to explain how it is affected by an increase in prices in the economy. If the value of the deflator equals 100, what does that tell you about that year with respect to the base year?

What will be an ideal response?


The formula for the GDP deflator is given by:
The GDP deflator = × 100

From this formula we can see that if prices are rising in the economy but production remains constant, nominal GDP will go up but real GDP will remain the same, so the deflator should rise. If prices rise more rapidly than production in the economy, then nominal GDP will rise relative to real GDP and the value of the GDP deflator will rise. It is in this way the deflator can help economists track changes in prices in the economy over time.
If the value of the deflator is 100 in a particular year, that year must be the base year or nominal GDP and real GDP are exactly the same.

Economics

You might also like to view...

Maria can work as a coal miner, where the probability of being killed in a work-related accident is 5/8,000, or she can earn work as a truck driver, where the probability of being killed in a work-related accident is 2/8,000

Using the compensating differential approach, the value of Maria's life is $4 million. How much more per year will working as a coal miner pay than working as a truck driver? A) $1,500 B) $2,000 C) $2,500 D) $3,500

Economics

Rational expectations involve the assumption that

A) market participants make use only of information on the past performance of an asset in determining what they believe its price should be. B) market participants rarely change their minds about the correct price of an asset. C) financial markets are good at increasing liquidity, but poor at transmitting information. D) market participants makes use of all available information.

Economics

In the collective bargaining process,

A. supply and demand analysis is used to determine the wage. B. the contract can legally cover only the wage or salary determined. C. there is often heated discussion with threats of strikes and counterthreats of lockout. D. the negotiation period is limited to 30 days.

Economics

When the price of ice cream falls, we would expect the quantity demanded of ice cream to rise, ceteris paribus

a. True b. False Indicate whether the statement is true or false

Economics