What is the main problem arising from the use of base year prices to measure real GDP? a. Over time, prices of some goods and services change relative to prices of other goods and services. b. Real GDP is calculated with the assumption that the purchasing power of a dollar increases from one year to the next. c. When real GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities. d. Real GDP is a measure of the value of production rather than the volume of production.
Question
What is the main problem arising from the use of base year prices to measure real GDP?
a. Over time, prices of some goods and services change relative to prices of other goods and services.
b. Real GDP is calculated with the assumption that the purchasing power of a dollar increases from one year to the next.
c. When real GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.
d. Real GDP is a measure of the value of production rather than the volume of production.
Solution
The correct answer is:
a. Over time, prices of some goods and services change relative to prices of other goods and services.
The main problem with using base year prices to measure real GDP is that it does not account for changes in relative prices over time. Some goods and services may become more expensive relative to others due to changes in demand, supply, technology, etc. If these changes in relative prices are not accounted for, it can distort the measurement of real GDP and make it less accurate.
Options b, c, and d are incorrect because they do not accurately describe the problem with using base year prices to measure real GDP. Real GDP is calculated to remove the effect of price changes, it does not assume that the purchasing power of a dollar increases. Real GDP is a measure of the volume of production, not the value of production. And when real GDP increases, it is due to changes in quantities, not prices.
Similar Questions
The drawback to calculating real GDP using base year prices is that: a. quality changes are reflected in base year prices. b. relative prices change over time and these are not reflected in base year prices, which distorts GDP. c. relative prices change over time and these changes are reflected in base year prices. d. real GDP in one year is not comparable to real GDP in another year.
Real GDP is the yearly production of final goods and services valued atGroup of answer choicescurrent prices.constant prices.expected future prices.the ratio of current prices to constant prices.
Nominal GDP ismultiple choiceadjusted for inflation, whereas real GDP is market or money value of all final goods and services produced by the economy in a given year.the market or money value of all final goods and services produced by the economy in a given year, whereas real GDP is adjusted for inflation.the sum of intermediate and final goods and services, whereas real GDP is only the sum of final goods and services.determined in the market, whereas real GDP is computed by a government agency.
Fill in the Blank QuestionFill in the blank question. GDP uses prices from a base year also referred to as constant prices.
Suppose nominal GDP in 2011 increased by 5% (over its previous level in 2010). Given this information we know with certainty that Group of answer choices real GDP increased during 2010 the price level increased during 2010 both the price level and the real GDP increased during 2010 either the price level or real GDP increased during 2010 more information is needed to answer this question.
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