Consider the following data that gives the quantity produced and unit price for three different goods across two different years to answer the following questions. Assume that the base year is 2015.

Good 2015 Price 2015 Quantity 2016 Price 2016 Quantity
A $2 250 $3 200
B $3 300 $2 400
C $4 400 $5 500

What was the gross domestic product (GDP) deflator in 2016?

a) 103 b) 108.3 c) 110 d) 120 e) 13

B) 108.3

Explanation:

Good   2015           2015       2015       2016         2016       2016

           price           qty.         total        price         qty.         total

A           $2            250         $500        $3           200         $600

B           $3            300         $900        $2           400         $800

C          $4             400      $1,600        $5            500       $2,500

total                                   $3,000                                      $3,900

real 2015 GDP in 2016 quantities = (200 x $2) + (400 x $3) + (500 x $4) = $400 + $1,200 + $2,000 = $3,600

Gross domestic product deflator is a way of measuring inflation rate. The formula for calculating the GDP's deflator is by dividing nominal GDP by real GDP.

GDP deflator = (nominal GDP 2016 / base year GDP 2015) x 100 = ($3900 / $3,600) x 100 = 108.33

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