Step 1: Understanding the Concept:
The GDP Deflator is a price index used to measure the level of prices of all domestically produced final goods and services in an economy.
It shows how much of the increase in Nominal GDP is due to price rises (inflation) rather than an increase in real output.
Step 2: Key Formula or Approach:
The standard formula for the GDP Deflator is:
\[ \text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100 \]
Detailed Explanation:
From the question, we have:
- Nominal GDP = \$600 billion (This is current year production at current year prices).
- Real GDP = \$500 billion (This is current year production at base year prices).
Now, calculate:
\[ \text{GDP Deflator} = \frac{600}{500} \times 100 \]
\[ \text{GDP Deflator} = 1.2 \times 100 \]
\[ \text{GDP Deflator} = 120 \]
Interpretation:
A value of 120 means that prices have risen by 20% since the base year.
The economy's output didn't grow by \$100 billion in real terms; rather, inflation inflated the value of the same output to \$600 billion.
Step 3: Final Answer:
The value of the GDP Deflator is 120.
Thus, Option (A) is correct.