Why may deflators for earlier years change when a new base year gives greater weight to a rapidly growing service sector?
Answer and explanation
Correct answer: Because output and price weights are recalculated
Rebasing changes the valuation framework used to calculate real GDP and the associated price index. Giving a rapidly growing service sector a greater weight can alter the composition of the output basket and the relative importance of its prices. Earlier measured deflators may therefore be revised, even though the historical market prices themselves have not changed. Thus option A is correct; the other choices describe unrelated changes.
Frequently asked questions
What is the correct answer to this question?
Because output and price weights are recalculated
Why is this the correct answer?
Rebasing changes the valuation framework used to calculate real GDP and the associated price index. Giving a rapidly growing service sector a greater weight can alter the composition of the output basket and the relative importance of its prices. Earlier measured deflators may therefore be revised, even though the historical market prices themselves have not changed. Thus option A is correct; the other choices describe unrelated changes.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
