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.

Calculate GDP Deflator(in percentage terms) based on the information given in the question number 42.

• A. 150 Percent
• B. 1.5 Percent
• C. 0.67 Percent
• D. 67 Percent

Hint:

GDP deflator = (nominal GDP / real GDP) x 100 = (9300 / 6200) x 100.

Answer 1

The Correct Option is A

Step 1: Use the price idea
The GDP deflator shows how much prices have risen from the base year. The price of wheat was Rs 20 in the base year 2020 and Rs 30 in 2021.

Step 2: Compare the prices
The price in 2021 divided by the price in 2020 is $30/20 = 1.5$. The base year index is 100, so the 2021 index is $1.5 \times 100 = 150$.

Step 3: Confirm with GDP values
Nominal GDP is $310 \times 30 = 9300$ and real GDP is $310 \times 20 = 6200$. Then $9300 \div 6200 \times 100 = 150$. Both routes give the same figure because only one good is made.

Step 4: Reject the other options
The figure 1.5 forgets the 100. The figures 0.67 and 67 come from dividing real GDP by nominal GDP, which is the inverse of the deflator. Only 150 percent fits.

Step 5: Write the answer
The deflator is 150 percent, which means prices in 2021 are 50 percent above the base year. This is option 1.

Step 6: Meaning of the answer
A deflator of 150 means the average price level in 2021 is 150 percent of the base year level, where the base year is 100. A rise from 100 to 150 is a 50 percent rise in prices, and this matches the wheat price moving from Rs 20 to Rs 30.

Final Answer:
The deflator is 150 percent, option 1. \[ \boxed{150\%} \]