GDP Deflator

Correct answer: A. As part of factor income from production

Explanation: A bonus paid to employees as compensation for their contribution to current production is treated as labour compensation and therefore forms part of factor income. Through the income method, factor payments such as wages, salaries, and production-related bonuses are connected with the income generated by GDP. It is not automatically a transfer payment.

Correct answer: B. 10 percent

Explanation: Initially, the GDP deflator is (1000 ÷ 1000) × 100 = 100. In the later period it is (1210 ÷ 1100) × 100 = 110. The index therefore rises from 100 to 110, which is a 10% increase. Option B is correct. The 21% rise in nominal GDP is not the deflator increase because real output also grew.

Correct answer: B. 6.67 percent

Explanation: Because the GDP deflator is proportional to nominal GDP divided by real GDP, its growth factor is 1.12 ÷ 1.05 = 1.0667. Therefore, deflator growth is (1.0667 − 1) × 100 ≈ 6.67 percent. The subtraction 12 − 5 = 7 percent is only a close first-order approximation, not the exact percentage calculation requested.

Correct answer: C. Remained unchanged

Explanation: The first year's GDP deflator is (750 ÷ 600) × 100 = 125. In the next year it is (810 ÷ 648) × 100 = 125 as well. Since the deflator represents the average price level relative to the base, an unchanged index indicates no change in that price level. The rise in both GDP measures reflects proportional growth, not inflation.

Correct answer: B. On weights determined by current production quantities

Explanation: The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100. Nominal GDP uses current prices and current quantities, whereas real GDP uses current quantities valued at base-year prices. Therefore, when one price rises and another falls, the overall deflator depends on the relative current production quantities and their value weights. It does not depend merely on a good’s name, population, or imports; option B is correct.

Correct answer: A. 17 percent rise

Explanation: The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100. The deflator changes by a factor of 130/100 = 1.30, while real GDP changes by a factor of 0.90. Hence nominal GDP changes by 1.30 × 0.90 = 1.17. Its final value is therefore 117 percent of the initial value, which means an exact increase of 17 percent. Simply adding or subtracting the two percentage changes would be incorrect.

Correct answer: B. About 13.6 percent

Explanation: Because the GDP deflator separates the price effect from nominal GDP, the real GDP growth factor is obtained by dividing the nominal growth factor by the deflator growth factor. Thus, real growth = (1.25 ÷ 1.10) − 1 = 0.13636, or approximately 13.6 percent. Simply subtracting 10 percent from 25 percent gives 15 percent, but that ignores the compound relationship between prices and output.

Correct answer: B. GDP deflator covers domestically produced final output, whereas CPI covers a consumer basket

Explanation: The GDP deflator is calculated as nominal GDP divided by real GDP, multiplied by 100, so its basket consists of final goods and services produced domestically and can change with current output. CPI measures the cost of a representative consumer basket, including imported consumer goods. Therefore option B is correct; neither index measures only imports, CPI has a base period, and the deflator is not a wage index.

Correct answer: D. 125

Explanation: The GDP deflator is calculated as nominal GDP divided by real GDP, multiplied by 100. Current nominal GDP is ₹25 × 120 = ₹3,000. Real GDP at base-year prices is ₹20 × 120 = ₹2,400. Thus the deflator is (3,000 ÷ 2,400) × 100 = 125. The current quantity appears in both calculations; using the base quantity incorrectly would lead to a different distractor.

Correct answer: C. It remained unchanged

Explanation: Real GDP is obtained from nominal GDP by dividing by the GDP deflator and multiplying by 100. If nominal GDP changes from N to 2N and the deflator changes from D to 2D, the new value is (2N ÷ 2D) × 100, which equals the original (N ÷ D) × 100. Hence real GDP remains unchanged; the equal movements reflect a proportional price increase rather than higher real output.

Correct answer: A. About 4.7 percent

Explanation: Because the GDP deflator is proportional to nominal GDP divided by real GDP, its growth factor is 1.12 ÷ 1.07 = 1.0467. Thus the deflator rises by approximately 0.0467 × 100 = 4.7 percent. Subtracting the two growth rates gives 5 percentage points, a rough approximation, but the ratio method gives the more accurate answer in option A.

Correct answer: C. 115

Explanation: Use the same current quantities for both valuations. Real GDP at base prices = (₹20 × 100) + (₹50 × 40) = ₹4,000 crore-equivalent. Nominal GDP at current prices = (₹24 × 100) + (₹55 × 40) = ₹4,600. GDP deflator = (Nominal GDP ÷ Real GDP) × 100 = (4,600 ÷ 4,000) × 100 = 115. Hence, option C is correct.

Correct answer: B. GDP deflator

Explanation: The GDP deflator covers prices of final goods and services produced within the domestic economy, so higher domestic prices tend to raise it. Imported consumer goods are excluded from GDP because they are not domestic production. CPI, in contrast, includes imported goods consumed by households, so falling import prices may offset its increase. Thus, option B is most likely.

Correct answer: C. 33.1 percent

Explanation: Nominal GDP equals real GDP multiplied by the GDP deflator, with the deflator expressed as an index. The deflator changes from 100 to 121, so its factor is 1.21; real GDP changes by a factor of 1.10. The combined factor is 1.21 × 1.10 = 1.331, giving a 33.1% nominal increase. Thus C is correct; adding 21% and 10% misses the interaction term.

Correct answer: A. 5.36 percent

Explanation: Since the GDP deflator is proportional to nominal GDP divided by real GDP, its growth factor is 1.18 ÷ 1.12. This equals approximately 1.05357, so the deflator grows by (1.05357 − 1) × 100 ≈ 5.36%. Option A is correct. Subtracting 12% from 18% gives 6%, but that is only a rough approximation and not the exact rate.

Correct answer: A. It rises by 6.67 percent

Explanation: Real GDP changes according to the ratio of nominal GDP change to the price-level change. Taking the initial values as 1, the new nominal GDP is 0.80 and the new price level is 0.75. Thus the real GDP ratio is 0.80 ÷ 0.75 = 1.0667. Real GDP therefore increases by approximately 6.67 percent, so option A is correct.

Correct answer: B. ₹1,250 crore

Explanation: The GDP deflator formula is GDP deflator = (nominal GDP ÷ real GDP) × 100. Rearranging gives real GDP = (nominal GDP ÷ deflator) × 100. Substitution gives (1,350 ÷ 108) × 100 = 1,250 crore. Thus option B is correct. Option A would result from an incorrect denominator or rounding, while D multiplies instead of deflating the nominal value.

Correct answer: C. 110

Explanation: The GDP deflator measures the price level relative to the base year and is calculated as (nominal GDP ÷ real GDP) × 100. Here, (1,584 ÷ 1,440) × 100 = 1.10 × 100 = 110. Hence option C is correct. A and B understate the price index, while D would require a larger nominal-to-real GDP ratio than the one given.

Correct answer: A. About 1.2 percent rise

Explanation: Nominal GDP changes through the product of the real-output factor and the price-level factor. A 15 percent real increase gives a factor of 1.15, while a 12 percent deflator fall gives a factor of 0.88. Their product is 1.15 × 0.88 = 1.012, so nominal GDP rises by 1.2 percent. Option B uses simple subtraction, and C and D misstate the direction or size.

Correct answer: B. ₹800 crore

Explanation: The GDP deflator is defined as (Nominal GDP / Real GDP) × 100. Rearranging gives Real GDP = (Nominal GDP × 100) / Deflator. Substituting the values, Real GDP = (₹1,080 × 100) / 135 = ₹800 crore. Thus option B is correct. Dividing 1,080 by 135 without multiplying by 100 would give an incorrect result because the deflator index is based on 100.

Correct answer: A. Current price level is 25 percent below the base year

Explanation: The GDP deflator is an index with the base-year value conventionally set at 100. A deflator of 75 means the current price level is 75% of the base-year price level. The difference is 100 − 75 = 25 percentage points, so prices are 25% lower than in the base year. Option A is correct; the index says nothing directly about a 25% fall in real output or zero nominal GDP.

Correct answer: C. 10.20 percent

Explanation: Because Nominal GDP = Price level × Real GDP, the price-level factor equals the nominal factor divided by the real-output factor. Thus it is 1.08 / 0.98 = 1.10204 approximately. The price level therefore rises by (1.10204 − 1) × 100 ≈ 10.20%. Adding 8% and 2% gives only a rough intuition, not the exact rate.

Correct answer: B. ₹300

Explanation: First convert nominal GDP into real GDP using Real GDP = Nominal GDP × 100 / Deflator. Thus real GDP = ₹1,800 crore × 100 / 150 = ₹1,200 crore. Dividing by the population of 4 crore gives real GDP per capita = ₹1,200 crore / 4 crore = ₹300 per person. Hence option B is correct; the other choices use an incorrect deflator adjustment or division.

Correct answer: C. 123.1

Explanation: The GDP deflator is calculated as (Nominal GDP / Real GDP) × 100. Substituting the values gives (₹1,920 / ₹1,560) × 100 = 123.0769..., which rounds to approximately 123.1. Therefore option C is correct. A and D result from incorrect division or rounding, while B does not represent the ratio of nominal to real GDP for the data given.

Correct answer: C. 120

Explanation: The GDP deflator measures the price level of currently produced final goods relative to the base year. Its index is calculated as (Nominal GDP index ÷ Real GDP index) × 100. Substitution gives (156 ÷ 130) × 100 = 1.2 × 100 = 120. Therefore option C is correct. Values such as 110 or 115 would result from an incorrect division or approximation, while 130 simply repeats the real index without applying the formula.