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: Understand the question
Real GDP is the value of the current year's output measured at the prices of the base year. Here the current year is 2021 and the base year is 2020. So we must value the 2021 output at the 2020 price.

Step 2: Write the formula
Real GDP = quantity in current year \(\times\) price in base year.

Step 3: Put in the numbers
Quantity in 2021 is 310 kg. Price in 2020 is Rs 20 per kg. So \[ \text{Real GDP} = 310 \times 20 = 6200 \] The answer is Rs 6200.

Step 4: Check option 1 (Rs. 9300)
This is \(310 \times 30\). It uses the 2021 price, so it is nominal GDP, not real GDP. Option 1 is WRONG.

Step 5: Check option 2 (Rs. 6200)
This matches our calculation. Option 2 is CORRECT.

Step 6: Check option 3 (Rs. 4000)
This is \(200 \times 20\), the GDP of the base year itself. It does not use the 2021 output. Option 3 is WRONG.

Step 7: Check option 4 (Rs. 6000)
This is \(200 \times 30\), which mixes 2020 output with 2021 price. It is not any GDP measure of 2021. Option 4 is WRONG.

Final Answer:
India's real GDP in 2021 at 2020 prices is Rs 6200. This is option 2. \[ \boxed{\text{Rs. } 6200} \]