# Economics

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The answer i got is :
GDP grew 10%

GDP for 2006 using 2005 as the base year increase by 20%

real GDP grow? 10%

If i'm right, let me know, if not, please show Calculation

Thank You

Use the following data to answer questions 1-3 (be sure to provide all calculations).
Quantity
Year CDs Tennis Racquets

2005 90 180
2006 100 90

Price
CD's Tennis Racquets
\$18 \$100
\$20 \$110

Calculate real GDP for 2005 and 2006 using 2005 prices. By what percent did real GDP grow?

Calculate the value of the price index for GDP for 2006 using 2005 as the base year. By what percent did prices increase?

Now calculate real GDP for 2005 and 2006 using 2006 prices. By what percent did real GDP grow?

• Economics -

Some clarifying questions first.

1) Am I to assume the entire economy consists of CDs and Tennis Racquets? I presume yes.
2) Is the Tennis Racquets production in 2006 really 90 -- should it be 190? I will assume 190.
3) You are asked to calculate a price index. There are 2 general methodologies: the Laspeyres index and the Paasche index. As the CPI is a Laspeyres index, I will assume you want the Lapeyres price index.
3) Most people calculate percentage change as (Xt/X0 - 1) (0 is the base y ear's value and t some time in the future or past). However, some economists prefer the mid-point method. I presume you want the "common" method over the mid-point method.

Now then GDP = sum(P*Q) over all goods so:
2005 GDP is 18*90 + 100*180 = 19620
2006 GDP is 20*100 + 110*190 = 22900
2006 GDP at 05 prices is 18*100 + 100*190 = 20800

Q1) Real GDP grew by 20800/19620 = 1.06 = 6%

The price index (Laspeyres method) is 100*(P2*Q1)/(P1*Q1)
CPI05 = 100
CPI06 = (20*90 + 110*180) / (18*90 + 100*180) = 100*(21600/19620) = 110

Q2) price index for 2006 is 110

Q3) Real 2006 GDP using 06 prices (e.g., deflate by CPI) is 22900/1.10 = 20818. Percent change in Real GDP is 20818/19620 = 6.1%

I hope this helps.

• Economics -

Thank You

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