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: Understand the question
The GDP deflator is the ratio of nominal GDP to real GDP, written as a percentage. The data are from the previous wheat question: 200 kg at Rs 20 in 2020 and 310 kg at Rs 30 in 2021, with 2020 as the base year.

Step 2: Write the formula
\[ \text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100 \]

Step 3: Find nominal GDP of 2021
Nominal GDP uses current prices: \(310 \times 30 = 9300\).

Step 4: Find real GDP of 2021
Real GDP uses base year prices: \(310 \times 20 = 6200\).

Step 5: Calculate the deflator
\[ \frac{9300}{6200} \times 100 = 1.5 \times 100 = 150 \] So the GDP deflator is 150 percent.

Step 6: Check option 1 (150 Percent)
This matches. Option 1 is CORRECT.

Step 7: Check option 2 (1.5 Percent)
This is the ratio 1.5 without multiplying by 100. The question asks for a percentage, so option 2 is WRONG.

Step 8: Check option 3 (0.67 Percent)
This comes from turning the ratio upside down (real GDP divided by nominal GDP, 0.67). That is not the deflator. Option 3 is WRONG.

Step 9: Check option 4 (67 Percent)
This is the upside down ratio multiplied by 100. It is wrong for the same reason. Option 4 is WRONG.

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