Question

The following table lists hypothetical values

1	2	3	4	5	6	7	8
Year	Nominal GDP	GDP Deflator (base year = 2014)	Real GDP (base year = 2014)	Percentage Change in Real GDP	GDP Deflator (base year = 2016)	Real GDP (base year = 2016)	Percentage Change in Real GDP
2012	950	90			81.8
2013	1025	92			83.6
2014	1075	100			90.9
2015	1150	105			95.5
2016	1300	110			100

Fill in column (4) by calculating real GDP using the GDP Deflator with the base year of 2014 from column (3). Fill in column (7) by calculating real GDP using the GDP Deflator with the base year of 2016 from column (6).

Fill in column (5) by calculating the annual percentage change in real GDP for each year, using the values from column (4), and fill in column (8) by calculating the annual percentage change in real GDP by using the values from column (7).

What effect does the change in the base year used to compute real GDP have on your calculations of the percentage change in real GDP?

Answer 1

1	2	3	4	5	6	7	8
Year	Nominal GDP	GDP Deflator (base year = 2014)	Real GDP (base year = 2014)	Percentage Change in Real GDP	GDP Deflator (base year = 2016)	Real GDP (base year = 2016)	Percentage Change in Real GDP
2012	950	90	1055.56		81.8	1161.37
2013	1025	92	1114.13	5.55%	83.6	1226.08	5.57%
2014	1075	100	1075.00	-3.51%	90.9	1182.62	-3.54%
2015	1150	105	1095.24	1.88%	95.5	1204.19	1.82%
2016	1300	110	1181.82	7.91%	100	1300.00	7.96%

Due to the change in base year from 2014 to 2016, there is a slightly bigger change in real GDP when base year of 2016 is taken with the exception of lower change in 2015. It has happened because base year of 2016, has higher price as the base price and it has increased the real GDP value of the past years with lower value of GDP deflator.