Question

The Economy of Nsiana produces two commodities, Yam and Kenkey. From the National income account, the quantity of Yam for year 1, Year 2 and Year three are respectively 60, 80, and 100 units. The quantity of Kenkey for the Year 1, Year 2 and Year 3 are 100, 110 and 130 units respectively. The price per unit of Yam for Year 1, Year 2, and Year 3 are respectively GH¢1.00, GH¢1.00, GH¢1.40. The price of Kenkey for three years are GH¢0.80, GH¢0.90 and GH¢1.00 respectively. From this information, If year 1 is the base year, the value for this economy’s GDP deflator in year 2

Answer 1

Step 1

Calculate nominal GDP for Year 2 -

Nominal GDP = [Quantity of Yam in year 2 * Price of Yam in year 2] + [Quantity of Kenkey in year 2 * Price of kenkey in year 2]

Nominal GDP = [80 * 1.00] + [110 * 0.90]

Nominal GDP = 80 + 99

Nominal GDP = 179

The nominal GDP for year 2 is 179.

Step 2

Calculate real GDP for Year 2 -

Real GDP = [Quantity of Yam in year 2 * Price of Yam in year 1] + [Quantity of Kenkey in year 2 * Price of kenkey in year 1]

Real GDP = [80 * 1.00] + [110 * 0.80]

Real GDP = 80 + 88

Real GDP = 168

The real GDP for year 2 is 168.

Step 3

Calculate the GDP deflator for Year 2

GDP deflator = [Nominal GDP/Real GDP] * 100

GDP deflator = [179/168] * 100

GDP deflator = 106.55

Thus,

The GDP deflator in Year 2 is 106.55