Question

GDP and Welfare
GDP is the sum total of the value of goods and services created within the geographical boundary of a country in a particular year. In order to compare the GDP figures and other macroeconomic variables of different countries or to compare the GDP figures of the same country at different points of time, we take the help of real GDP instead of relying on current market prices. The ratio of nominal GDP to real GDP gives us an idea of how prices have moved from the base year to the current year. The Consumer Price Index (CPI) and Wholesale Price Index (WPI) are the other important ways to measure change of prices in an economy.

GDP gets distributed among the people as incomes and may treat higher level of GDP of a country as an index of greater well-being of the people of that country. But it may be incorrect to treat GDP as an index of the welfare of the country based on three reasons. Firstly, the distribution of GDP is not uniform, secondly, non-monetary exchanges are not accounted as part of economic activity and lastly, GDP does not take into account externalities.

Suppose India only produces wheat. In the year 2020, India produced 200 kg of wheat at a price of Rs 20 per kg of wheat and in the year 2021, it produced 310 kg of wheat at a price of Rs 30 per kg of wheat. Calculate India's real GDP of year 2021 taking 2020 as base year.

• A. Rs. 9300
• B. Rs. 6200
• C. Rs. 4000
• D. Rs. 6000

Hint:

Real GDP = current year quantity times base year price = 310 x 20.

Answer 1

The Correct Option is B

Step 1: Separate price effect from quantity effect
From 2020 to 2021 the wheat price rose from Rs 20 to Rs 30. Real GDP removes this price rise, so only the change in quantity should show up.

Step 2: Find the change in quantity
Output rose from 200 kg to 310 kg, an increase of 110 kg. This is the real growth.

Step 3: Value the output at base prices
The base year GDP is $200 \times 20 = 4000$. The extra 110 kg is valued at the base price of Rs 20, which gives $110 \times 20 = 2200$.

Step 4: Add them
\[ 4000 + 2200 = 6200 \] So real GDP of 2021 is Rs 6200.

Step 5: Match with the options
Rs 9300 is nominal GDP, Rs 4000 is base year GDP, and Rs 6000 uses the wrong price. Only Rs 6200 fits, so option 2 is correct.

Step 6: Quick sense check
The price rose by half (20 to 30), and the quantity rose from 200 to 310. Nominal GDP grew from 4000 to 9300. If we remove the price rise, the value must be lower than 9300 and higher than 4000. Rs 6200 sits between them, and it is the only option that uses the 2021 quantity with the 2020 price.

Final Answer:
Real GDP of 2021 at base year 2020 prices is Rs 6200, which is option 2. \[ \boxed{\text{Rs. } 6200} \]