A country produces bread and cloth. In the base year bread cost Rs 10 and cloth Rs 50. In the current year it produces 110 units of bread at Rs 12 and 25 units of cloth at Rs 55. What is the GDP deflator of the current year (approximately, in percentage terms)?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → 114.68
Given:
Base-year prices: bread Rs 10, cloth Rs 50
Current year: 110 units of bread at Rs 12
Current year: 25 units of cloth at Rs 55
GDP deflator = nominal GDP ÷ real GDP. Both use the current-year quantities; real GDP values them at base-year prices.
Nominal GDP = 110 × 12 + 25 × 55 = 1,320 + 1,375 = 2,695
Real GDP = 110 × 10 + 25 × 50 = 1,100 + 1,250 = 2,350
GDP deflator = (2,695 ÷ 2,350) × 100 ≈ 114.68
115 is the simple average of the two price rises (20% and 10%). The deflator instead weights each good by how much of it is produced.
NCERT (2026-27): “2.4 Nominal and Real GDP … Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year. In the calculation of real and nominal GDP of the current year, the volume of production is fixed. Therefore, if these measures differ it is only due to change in the price level between the base year and the current year. The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator. …” “2.4 Nominal and Real GDP … 3. The weights are constant in CPI – but they differ according to production level of each good in GDP deflator.” |