Question

If the real Gross Domestic Product (GDP) of an economy is \$500 billion and the nominal GDP stands at \$600 billion, what is the value of the GDP Deflator?

• A. \( 120 \)
• B. \( 83.33 \)
• C. \( 110 \)
• D. \( 200 \)

Hint:

Keep your variables in the correct position: Nominal GDP (current prices) always sits in the numerator, and Real GDP (inflation-adjusted constant prices) always sits in the denominator.

Answer 1

The Correct Option is A

Concept: The GDP Deflator is a comprehensive price index used to track changes in the general price level of all domestically produced goods and services in an economy. It is calculated by finding the ratio between current-price output (Nominal GDP) and constant-price output (Real GDP): \[ \text{GDP Deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100 \]

Step 1: Extract the given output and price metrics. From the problem statement, we isolate our core values:

• Nominal GDP = \$600 billion
• Real GDP = \$500 billion

Step 2: Substitute values into the price index equation. Plug these values directly into the GDP deflator formula: \[ \text{GDP Deflator} = \frac{600}{500} \times 100 \] Simplify the base fraction component: \[ \frac{600}{500} = \frac{6}{5} = 1.2 \] Complete the index calculation by multiplying by 100: \[ \text{GDP Deflator} = 1.2 \times 100 = 120 \] A deflator value of 120 indicates that the general price level has increased by exactly 20% relative to the base year.