GDP

[Rishabh Joshi]

How to solve this question? I'm getting a different answer.
In the (ii) part, I applied the formula of GDP deflator to find the real income and then applied the formula of REAL GDP per head. But got the wrong answer. Please tell me how to solve both the parts and any other formula that i can use here.
Government statisticians in Country X are trying to estimate the changes in the country’s standard of living over a 10-year period. The following table shows the available information.
GDP (in $000 millions) at current prices GDP for 2010= 250
GDP (in $000 millions) at current prices GDP for 2020= 750
GDP deflator (1996 = 100)* for 2010= 136
GDP deflator (1996 = 100)* for 2020= 258
Population (in millions) in 2010= 50
Population (in millions) in 2020= 60
(i) Calculate the GDP for 2020 at 2010 prices, and hence the increase in real GDP. (ii) Calculate the growth in real GDP per head between 2010 and 2020.
(ii) Calculate the growth in real GDP per head between 2010 and 2020.

 

[Richie Holway]

Hi Rishabh, please can you advise which exam paper (year, month and question) this question has been taken from.

Kind regards,
Richie

 

[Rishabh Joshi]

Hi Rishabh, please can you advise which exam paper (year, month and question) this question has been taken from.

Kind regards,
Richie

This question is from CB2 Business Economics. Taken from Core Reading of 2021. Not from any question paper. Just a practice question

 

[Rishabh Joshi]

Hi Rishabh, please can you advise which exam paper (year, month and question) this question has been taken from.

Kind regards,
Richie

Here's the solution, but I couldn't find this formula anywhere
(i) GDP for 2020 at 2010 prices
GDP for 2020 at 2010 prices = GDP at 2020 prices* GDP Deflator(2010)/ GDP Deflator(2020)= 750*136/258= 395.349

 

[Richie Holway]

Hi Rishabh,

Thanks for confirming.

Comparing the GDP figure from one year to another can be misleading because prices might have changed. To get around this, we can compare real GDP figures: that is compare the GDP from one year to another but where both are based on prices in the same year.

The information in the question reveals the GDP for 2020 based on actual prices in 2020 is 750. In relative terms, the GDP deflator information tells us that the average price of goods at this point was 258, whereas the average price of goods in 2010 was 136. So to work out how many goods the 750 of 2020 GDP could buy in 2010, we need to divide the 750 by the average price in 2020 and multiply by the average price in 2010, hence the calculation is 750 * 136 / 258 = 395.349.

As this is the 2020 number but based on 2010 prices, we can compare it directly to the 2010 GDP number based on 2010 prices in order to see the change in real GDP. So the change is 395.349 / 250 = 1.581, or in other words, real GDP has increased by 58.1%.

For part (ii), we need to take the real GDP per head in 2020 and divide it by the real GDP per head in 2010 in order to see the percentage change.

Real GDP per head in 2020 = real GDP in 2020* / population in 2020 = 395.349 / 60 = 6.589.
Real GDP per head in 2010 = real GDP in 2010* / population in 2010 = 250 / 50 = 5

So the change is 6.589 / 5 = 1.318, or in other words, an increase of 31.8%.

* throughout this, real GDP is treated as GDP in 2010 prices. We could have converted all the numbers to use 1996 prices or 2020 prices instead, but the relative positions and hence the percentage changes would be the same.

I hope this helps.

Richie