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Chapter 8: Q. 6 (page 186)

Look back at Table 8-3, which explains how to calculate real GDP in terms of 2009constant dollars. Change the base year to2007. Recalculate the price index, and then recalculate real GDP-that is, express column4of Table 8-3 in terms of 2007dollars instead of 2009dollars.

Short Answer

Expert verified

The values of Real GDP are lower than those in the preceding column.

Step by step solution

01

    Introduction

Nominal GDP is the dollar value of GDP calculated using current market values and expressed in current year prices. The term "real GDP" refers to nominal GDP after inflation adjustment. To calculate real GDP, multiply nominal GDP by the price index.

02

    Taking the base year as 2009

Includes the same information The second column displays the nominal GDP at current prices. Real GDP is calculated in the same way. 2009as the base year.

Table1

The real GDP is calculated in the last column using 2005as the base year. Observe that when the base year is 2005, Real GDP values are lower than those in the preceding column.

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c. As a follow-up to part (b), suppose that as soon as Maria bends down to dip her brush into the paint, she realizes that painting will be too hard on her back after all. She decides to hire someone else to do all the work using the materials she has already purchased. In this case, how much will her spring painting activity contribute to GDP?
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