The following table contains information about an economy that produces only pens and books. The base year is 2017. Use this information to answer question

Question

Year

Price of Pens

Quantity of Pens

Price of Books

Quantity of Books

2017

2018

2019

$3

3

4

100

120

120

$10

12

14

50

70

70

What is the value of the GDP deflator in 2018?

a. 113

b. 119

c. 138

d. 100

e. 116

Answer 1

To calculate the GDP deflator for 2018, we first need to determine the nominal GDP and real GDP.

1. Calculating Nominal GDP for 2018:

   • Use the prices and quantities for 2018.

   \[ \text{Nominal GDP} = (\text{Price of Pens} \times \text{Quantity of Pens}) + (\text{Price of Books} \times \text{Quantity of Books}) \]

   \[ = (3 \times 120) + (12 \times 70) \]

   \[ = 360 + 840 = 1200 \]

2. Calculating Real GDP for 2018:

   • Use the prices from the base year (2017) and the quantities from 2018.

   \[ \text{Real GDP} = (\text{Price of Pens in 2017} \times \text{Quantity of Pens in 2018}) + (\text{Price of Books in 2017} \times \text{Quantity of Books in 2018}) \]

   \[ = (3 \times 120) + (10 \times 70) \]

   \[ = 360 + 700 = 1060 \]

3. Calculating GDP Deflator for 2018:

   \[ \text{GDP Deflator} = \left( \frac{\text{Nominal GDP}}{\text{Real GDP}} \right) \times 100 \]

   \[ = \left( \frac{1200}{1060} \right) \times 100 \approx 113.21 \]

   Rounding this gives us a GDP deflator of approximately 113.

Thus, the answer is:

a. 113.