GDP Deflator

Correct answer: A. A comparable base-year price may not be available

Explanation: The GDP deflator compares current nominal values with quantities priced at base-year prices. A technological good introduced after the base year has no directly observed price from that earlier period. Statistical agencies may need a comparable product, hedonic quality adjustment, or another estimation method. Hence A is correct; the good’s current quantity is not necessarily unknowable, and C and D are false.

Correct answer: A. A quality adjustment should be made

Explanation: A price increase can contain two components: pure inflation and payment for improved characteristics or quality. The GDP deflator should isolate the change in the price of a comparable unit, so statistical measurement requires a quality adjustment. Option A is correct. Treating the full increase as inflation overstates price growth, while excluding the good or assigning zero is unjustified.

Correct answer: C. 120

Explanation: The GDP deflator is a price index calculated as (Nominal GDP ÷ Real GDP) × 100. Substituting the values gives (1,440 ÷ 1,200) × 100 = 1.2 × 100 = 120. Thus, option C is correct. A deflator of 120 also indicates that the overall price level is 20% above the base-year level; the other options do not follow from the stated ratio.

Correct answer: C. ₹1,296 crore

Explanation: Starting with Deflator = (Nominal GDP ÷ Real GDP) × 100, rearrange to Nominal GDP = Real GDP × Deflator ÷ 100. Therefore, Nominal GDP = 960 × 135 ÷ 100 = 960 × 1.35 = ₹1,296 crore. Hence option C is correct. The other amounts do not apply the 1.35 price-level multiplier correctly to real GDP.

Correct answer: C. ₹1,200 crore

Explanation: Use Deflator = (Nominal GDP ÷ Real GDP) × 100 and rearrange: Real GDP = Nominal GDP × 100 ÷ Deflator. Thus, Real GDP = 1,530 × 100 ÷ 127.5 = 153,000 ÷ 127.5 = ₹1,200 crore. Therefore, option C is correct. The decimal deflator is handled as 127.5, not as 1.275 in this formula.

Correct answer: B. 15 percent

Explanation: Inflation is the percentage increase relative to the initial price index. Calculate it as [(138 − 120) ÷ 120] × 100 = (18 ÷ 120) × 100 = 15%. Thus, option B is correct. The 18-point increase is not an 18% inflation rate, while 12% and 20% use an incorrect denominator or calculation.

Correct answer: C. 15 percent

Explanation: The percentage decline must be measured against the original deflator. The fall is 160 − 136 = 24 index points. Percentage decline = (24 ÷ 160) × 100 = 15%. Therefore, option C is correct. The answer is not 24%, because 24 is the index-point fall; using the initial value as the denominator converts it into the correct percentage change.

Correct answer: B. 9.26 percent

Explanation: Since the deflator equals nominal GDP divided by real GDP, use growth factors rather than simply subtracting rates. Deflator growth = [(1.18 ÷ 1.08) − 1] × 100 = 9.259..., or approximately 9.26%. Therefore, option B is correct. The 10% difference between growth rates is only an approximation and is not the exact rate requested.

Correct answer: A. 6.25 percent fall

Explanation: The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100. After the changes, nominal GDP is 0.90 of its original value and real GDP is 0.96 of its original value. Thus the deflator factor is 0.90/0.96 = 0.9375, so it falls by 1 − 0.9375 = 0.0625, or 6.25%. Option A is therefore correct; option B is only a rough subtraction and ignores the ratio.

Correct answer: A. 5.36 percent fall

Explanation: The deflator is proportional to nominal GDP divided by real GDP. The new nominal value is 1.06 times the old value, while the new real value is 1.12 times the old value. Hence the deflator factor is 1.06/1.12 = 0.946428..., implying a fall of about 5.36%. Option A is correct. A direct subtraction of 12% − 6% gives 6%, but that is only an approximation and not the exact ratio-based result.

Correct answer: C. 60 percent

Explanation: The GDP deflator is nominal GDP divided by real GDP, with the same base factor in both periods. A doubling of nominal GDP gives a multiplier of 2, while a 25% increase in real GDP gives a multiplier of 1.25. The deflator multiplier is therefore 2/1.25 = 1.6. Its increase is 1.6 − 1 = 0.6, or 60%. Option C is correct; 80% would incorrectly use only the nominal change.

Correct answer: B. 25 percent

Explanation: The GDP deflator equals nominal GDP divided by real GDP, multiplied by 100. With nominal GDP unchanged, let its original value be 1. A 20% fall makes real GDP 0.80 of its original value. The new deflator is therefore 1/0.80 = 1.25 times the old deflator, which is a 25% rise. Option B is correct. The 20% choice wrongly assumes that an equal percentage fall in the denominator creates an equal rise in the ratio.

Correct answer: A. It falls by 25 percent

Explanation: Because the GDP deflator is nominal GDP divided by real GDP, holding real GDP constant makes the deflator move in exactly the same proportion as nominal GDP. A 25% fall in nominal GDP changes its multiplier to 0.75, while the real-GDP multiplier remains 1. Thus the deflator multiplier is 0.75/1 = 0.75, a 25% fall. Option A is correct; no denominator change occurs to offset the fall.

Correct answer: A. 15 points and 10 percent

Explanation: The index-point change is found by subtraction: 165 − 150 = 15 points. The inflation rate is the percentage change relative to the initial index, not the final index: (15/150) × 100 = 10%. Therefore option A is correct. Option C confuses the 15-point difference with a 15% rate, while options B and D calculate the point change incorrectly.

Correct answer: C. 137.5

Explanation: For the new year, use the new nominal and real GDP values directly. The GDP deflator formula is (nominal GDP/real GDP) × 100. Substitution gives (2310/1680) × 100 = 1.375 × 100 = 137.5. Hence option C is correct. The older values can be used to find the previous deflator, but they are unnecessary for the requested new-year index and should not distract from the calculation.

Correct answer: B. 10 percent

Explanation: Inflation is the percentage increase in the price index relative to its initial value. The deflator rises by 137.5 − 125 = 12.5 index points. Dividing this increase by the initial deflator gives (12.5/125) × 100 = 10%. Therefore option B is correct. The value 12.5 is the index-point increase, not the inflation percentage, and 37.5 is simply the final-minus-unrelated-base error.

Correct answer: D. 125

Explanation: Real GDP is 80% of nominal GDP, so the real-to-nominal ratio is 0.80. The GDP deflator is (nominal GDP/real GDP) × 100. Thus its value is (1/0.80) × 100 = 125. The rupee amount cancels because only the ratio matters. Option D is correct. A value of 80 would reverse the formula and calculate real GDP as a percentage of nominal GDP rather than the deflator.

Correct answer: B. 80

Explanation: If real GDP is 25% higher than nominal GDP, let nominal GDP be 1. Real GDP is then 1.25. Using the GDP deflator formula, (nominal GDP/real GDP) × 100, we get (1/1.25) × 100 = 80. Therefore option B is correct. The value 125 is the inverse relationship, real GDP as a percentage of nominal GDP, not the nominal-to-real deflator index.

Correct answer: A. Because their coverage and weights differ

Explanation: The GDP deflator measures prices of final goods and services produced domestically, with weights that reflect current domestic production. CPI measures the cost of a selected consumer basket, including relevant imported consumer goods, using its own weights. Since coverage and weights differ, their inflation rates can differ. Thus option A is correct; B, C, and D contradict the definitions.

Correct answer: A. The direct effect on the GDP deflator will be limited

Explanation: The GDP deflator covers prices of final goods and services produced within the domestic economy. Imported petrol is not domestic production, so its price is not directly included in the deflator’s domestic-output coverage. It may indirectly raise transport or production costs, but that effect is not automatic or necessarily large. Therefore option A is the most appropriate; the other statements are absolute and false.

Correct answer: A. Because a new domestic capital good is part of final output

Explanation: A newly produced machine purchased for investment is a final capital good, because it is not being bought for further processing in the same accounting period. Since it is produced domestically and forms part of gross fixed investment, its price contributes to nominal GDP and can influence the GDP deflator. Therefore option A is correct; B, C, and D incorrectly exclude domestic capital goods.

Correct answer: A. There will be no direct effect

Explanation: The GDP deflator compares the value of final domestic output at current prices with its value at base-year prices. Intermediate goods are not counted separately because doing so would double-count the value already embodied in final goods. If final-good prices and value added remain unchanged, a rise limited to intermediate prices has no direct effect on the deflator. Hence option A is correct.

Correct answer: A. Because it is based on the current production structure

Explanation: The GDP deflator is an implicit price index calculated from nominal GDP and real GDP. Its relative weights are influenced by the quantities and composition of goods and services produced in the current period. As production shifts toward or away from particular products, their importance in the index changes. Therefore option A is correct; CPI’s fixed-basket idea makes option B unsuitable here.

Correct answer: A. Because its base-year price is unavailable

Explanation: A price change normally requires a comparable price for the same or a suitably adjusted service in both the current and base periods. A newly introduced digital service has no observed base-year price, and quality changes may make simple comparison difficult. Statistical agencies may use an estimated comparable price or revise the base series. Thus option A is correct; the other statements make unsupported universal claims.

Correct answer: A. Because the current production structure and new goods are not represented well

Explanation: A base year supplies the price and production reference used to express real GDP and construct the deflator. Over time, consumers’ choices, technology, production shares, and available products change. If the base year is very old, important current goods may be missing and outdated goods may receive inappropriate importance. Consequently, the index may represent today’s price structure poorly. Option A is correct.