GDP Deflator

Correct answer: A. Because it is a domestic final investment good

Explanation: A newly produced road machine is a capital good, and once purchased for use rather than resale it is treated as a final good. Since it is produced domestically, its value enters GDP through investment or government-related final expenditure, depending on the institutional treatment. A price increase can therefore affect the GDP deflator. Options B and C contradict the facts, and government purchases are included in GDP, so A is correct.

Correct answer: A. Because the deflator is based on final output or value added

Explanation: National accounts avoid double counting by excluding the separate value of intermediate raw materials from final GDP. A raw-material price change may alter production costs, but if the final-good price and the recorded value added remain unchanged, no direct price change appears in the final output measure used by the deflator. Thus option A is correct. The other choices make false claims: raw materials are not always imported, their prices are not zero, and final goods are included in GDP.

Correct answer: A. Manufacturing weight may fall and services weight may rise

Explanation: The GDP deflator is an implicit price index based on the value and composition of current domestic production. When the production structure changes, the relative importance, or weight, of sectors can also change. If manufacturing contributes a smaller share and services a larger share, manufacturing may receive a lower weight while services receive a higher one. Therefore option A is correct; the weights are not permanently fixed, services do not become zero, and imports are not the only relevant component.

Correct answer: A. It better represents new goods and the current production structure

Explanation: The governing concept is the choice of a representative base year for separating price changes from output changes. In a fast-changing economy, an old base year may omit new products and give inappropriate weights to sectors whose importance has changed. Revising the base year improves the relevance of real GDP and the deflator. Hence A is correct; the other options describe no valid effect of rebasing.

Correct answer: B. The second economy

Explanation: Use the deflator identity: Real GDP = (Nominal GDP ÷ GDP deflator) × 100. For the first economy, real GDP = (4,200 ÷ 175) × 100 = ₹2,400 crore. For the second, it is (3,900 ÷ 130) × 100 = ₹3,000 crore. Since ₹3,000 crore exceeds ₹2,400 crore, option B is correct. The larger nominal GDP alone does not guarantee larger real GDP.

Correct answer: A. 5 percent fall

Explanation: Use the growth-factor relationship: Real GDP factor = Nominal GDP factor ÷ Deflator factor = 1.14 ÷ 1.20 = 0.95. A factor of 0.95 means real GDP becomes 95 percent of its initial value, so it falls by 5 percent. Option A is correct. Subtracting 20 from 14 gives the same result here, but the factor method is the exact method and avoids errors in other cases.

Correct answer: B. 20 percent

Explanation: Convert the percentage changes into factors. Nominal GDP becomes 0.78 of its original value, while the deflator becomes 0.65. Therefore the real GDP factor is 0.78 ÷ 0.65 = 1.20. Real GDP is consequently 120 percent of its starting level, giving an exact growth rate of 20 percent. Option B is correct; adding or subtracting percentage changes directly would be incorrect.

Correct answer: B. 20.96 percent

Explanation: Nominal GDP equals real GDP multiplied by the price-level factor represented by the deflator. Thus the nominal GDP factor is 1.08 × 1.12 = 1.2096. Subtracting 1 and multiplying by 100 gives a growth rate of 20.96 percent. Option B is correct. Adding 8 and 12 ignores the interaction term of 0.08 × 0.12, while 21.6 percent uses an incorrect multiplication.

Correct answer: A. 0.3 percent rise

Explanation: Nominal GDP is obtained by multiplying real GDP by the deflator factor. After a 15 percent fall, real GDP has factor 0.85; after an 18 percent rise, the deflator has factor 1.18. Their product is 0.85 × 1.18 = 1.003, or 100.3 percent of the original nominal GDP. Hence nominal GDP rises exactly by 0.3 percent, so A is correct.

Correct answer: B. 20% rise

Explanation: The governing relationship is nominal GDP = real GDP × GDP deflator, using index ratios. A 60% rise gives a ratio of 1.60, while a 25% fall gives 0.75. Their product is 1.60 × 0.75 = 1.20, so nominal GDP becomes 120% of its original value and therefore rises by 20%. Option A ignores the multiplicative effect, while option D simply adds the percentage changes.

Correct answer: A. 20% fall

Explanation: Nominal GDP is obtained by multiplying real GDP by the deflator ratio. A 36% fall in real GDP leaves 0.64 of the original amount, and a 25% deflator rise gives a ratio of 1.25. Thus nominal GDP changes by 0.64 × 1.25 = 0.80. It becomes 80% of its initial value, so it falls by 20%. The answer is not 11%, because percentage changes must be combined multiplicatively.

Correct answer: C. 52%

Explanation: The relationship is real GDP = nominal GDP divided by the deflator. A 90% nominal increase gives a ratio of 1.90, and a 25% deflator increase gives 1.25. Therefore the real GDP ratio is 1.90 ÷ 1.25 = 1.52. Real GDP is consequently 152% of its initial level, which means a 52% growth rate. Adding 90% and 25% would be incorrect because the deflator must be divided out.

Correct answer: A. Current production weights and each good's price changes

Explanation: The GDP deflator is an aggregate price index: it compares the value of current domestic production at current prices with its value at base-year prices. Therefore, the direction of the total index depends on each good's price change and its weight in current production. Merely counting price increases is insufficient; a heavily weighted falling-price good could offset rises elsewhere. The other data choices do not determine this index.

Correct answer: A. It may reduce overall price growth by increasing the weight of a stable-price good

Explanation: The GDP deflator is influenced by current-production weights as well as prices. A sharp increase in the output of this good can give its stable price a larger weight in the current basket. If other goods have rising prices, the stable-price good can pull the weighted average increase downward. The effect is not necessarily a doubling, and the good does not remove other goods from the index.

Correct answer: A. A tendency to fall because domestic service prices decline

Explanation: The GDP deflator measures prices of domestically produced final goods and services. Imported goods are excluded from domestic GDP, so their price increase has no direct effect on this deflator, although it may affect other price measures. Domestic final services are included; a 15% fall in their prices therefore creates downward pressure, with the exact total effect depending on their production weight.

Correct answer: A. The cost of living for all consumers rose by exactly 18 percent

Explanation: A GDP deflator measures prices of domestically produced final goods and services, while CPI measures the cost of a representative consumer basket. Neither index guarantees that every household faces the same price change. Therefore an exact 18 percent rise in the cost of living for all consumers cannot be concluded. Option A is correct.

Correct answer: C. 20 percent

Explanation: The GDP deflator is proportional to nominal GDP divided by real GDP. Hence its growth factor is (1 + 0.44) ÷ (1 + 0.20) = 1.44 ÷ 1.20 = 1.20. The deflator therefore increases by 1.20 − 1 = 0.20, or exactly 20 percent. Option C is correct; subtracting the two growth rates would give only an approximation, not the exact answer.

Correct answer: B. About 9.3 percent rise

Explanation: The deflator compares nominal GDP with real GDP, so compare their remaining factors after the changes. Nominal GDP becomes 0.82 of its original value, while real GDP becomes 0.75. The deflator factor is therefore 0.82 ÷ 0.75 = 1.0933 approximately, indicating a rise of about 9.3 percent. Thus option B is correct; comparing the percentage falls directly would be misleading.

Correct answer: B. About 66.7 percent rise

Explanation: The deflator equals nominal GDP divided by real GDP, apart from the common index base. With nominal GDP unchanged, its factor is 1. Real GDP falls by 40 percent, so its factor is 0.60. The deflator factor becomes 1 ÷ 0.60 = 1.6667, which means a rise of about 66.7 percent. Thus option B is correct; the answer is not merely 40 percent because the denominator has fallen.

Correct answer: B. 20 percent rise

Explanation: Since Real GDP is proportional to nominal GDP divided by the deflator, compare the remaining factors: nominal GDP becomes 0.96 of its original value and the deflator becomes 0.80. The real GDP factor is 0.96 ÷ 0.80 = 1.20, so real GDP rises by 20 percent. Therefore option B is correct. Dividing the percentage changes directly or subtracting them would not give the correct multiplicative result.

Correct answer: B. The effect may be limited

Explanation: The GDP deflator is a price index based on the prices of domestically produced final goods, with their economic weights reflected in the aggregate. If one good has a very small output weight, even a doubling of its price contributes only a small amount to the overall index. Thus option B is correct; the deflator need not double, halve, or ignore all other prices.

Correct answer: A. CPI may fall and the GDP deflator may rise

Explanation: The CPI can include imported consumer goods, so falling import prices may reduce it. The GDP deflator, however, covers prices of final goods and services produced within the domestic economy and excludes imports. If domestic final-output prices rise, the deflator may rise. Therefore option A is correct; the two indices need not move together or by equal amounts.

Correct answer: C. There will be no direct change

Explanation: The GDP deflator compares the value of current domestic final output at current prices with its value at base-year prices. A fall in the price of an imported input does not directly enter this index because the input is not domestic final output. If producer margins offset the cost change and the final-good price stays unchanged, there is no direct change in the deflator. Option C is correct.

Correct answer: B. GDP deflator

Explanation: Exports are produced domestically and are included in GDP even though they are purchased by foreign buyers. Consequently, a rise in export prices can raise the GDP deflator. The CPI mainly represents the prices of goods and services consumed by domestic households, so export prices may have little or no direct weight in it. Therefore option B is the best answer; equal movement is not required.

Correct answer: B. The deflator may rise because it is domestic final output

Explanation: Government expenditure on a newly produced defence machine is a purchase of final domestic output, even though it is not a household consumption good. Its price is therefore relevant to the prices underlying the GDP deflator. If its price rises, the deflator may rise, depending on its weight and other prices. Option B is correct. Government purchases are not automatically excluded, and real GDP need not fall.