GDP Deflator

Correct answer: B. 15.8 percent

Explanation: Successive annual increases compound because each 5% rise is calculated on the previous year’s higher deflator. The total growth factor is \((1.05)^3 = 1.157625\). Therefore, the cumulative increase is \(1.157625 − 1 = 0.157625\), or approximately 15.8%. Option B is correct. Adding 5% + 5% + 5% gives 15%, but that ignores the additional increase earned on earlier increases.

Correct answer: A. No change

Explanation: Percentage changes over successive years must be compounded, not simply added or subtracted. Starting with an index of 100, the 25 percent rise gives 100 × 1.25 = 125. A 20 percent fall then gives 125 × 0.80 = 100. The final index is therefore the same as the initial index, so the total change is zero. Option B ignores compounding, while option D adds the two rates.

Correct answer: A. No change

Explanation: The governing idea is that consecutive percentage changes are multiplicative. Let the original deflator be 100. After a 20 percent fall it becomes 100 × 0.80 = 80. A subsequent 25 percent rise changes it to 80 × 1.25 = 100. Thus it returns exactly to its starting value and the net change is zero. The rates cannot be treated as a simple 25 − 20 = 5 percent change.

Correct answer: A. Usually on the basis of production cost

Explanation: Government services such as public administration, policing or defence are often supplied without a market sale, so a direct market price is unavailable. In national-income accounting, their output is therefore generally valued using the cost of producing the service, including relevant compensation and other production costs. Profit is not the basis, the exchange rate is irrelevant, and assigning zero would omit real output.

Correct answer: A. Unpriced benefits are not fully recorded

Explanation: A GDP deflator is constructed from recorded values of domestically produced final output, and such valuation usually depends on observable prices. A free digital service may create substantial consumer utility even though users pay nothing; its unpriced benefit is consequently not fully reflected in measured GDP or the associated price index. The other choices describe no necessary consequence of a zero-price service.

Correct answer: A. It shows only the price level and not income distribution

Explanation: The GDP deflator is a broad price index: it compares the value of current domestic output at current prices with its value at base-year prices. It does not reveal who receives income, how evenly income is distributed, whether real income per person has risen, or whether environmental and non-market costs have changed. Therefore option A states the relevant limitation; the other choices incorrectly describe what the deflator measures.

Correct answer: A. Because it is not new production in the current year

Explanation: GDP records the value of final goods and services produced during the current period. A used good was counted when it was first produced, so counting its entire resale price again would duplicate earlier output rather than measure new production. The resale transaction itself may involve a current service, such as a dealer's or broker's service, and that service can be counted separately. Hence option A is correct.

Correct answer: A. Because brokerage is a service produced in the current year

Explanation: The used asset itself is not current production, so its resale price is excluded from current GDP. Brokerage, however, is a distinct service supplied by an agent during the current period. Payment for that service represents current economic production and can be included in measured domestic output, provided the broker operates domestically. It is not a transfer payment, and the asset does not become new merely because it is resold.

Correct answer: A. The weight of cheaper goods may increase

Explanation: The GDP deflator is based on the prices and quantities of goods and services produced domestically in the current period. Its implicit weights reflect the current composition of domestic output. If production shifts toward cheaper goods, those goods account for a larger share of nominal and real GDP calculations, so their relative weights may increase. Weights do not necessarily remain fixed, and imports alone do not determine the GDP deflator.

Correct answer: B. 15 percent

Explanation: The GDP deflator measures the current price level relative to the base year: GDP deflator = (Nominal GDP ÷ Real GDP) × 100 = (1,700 ÷ 2,000) × 100 = 85. A deflator of 85 means the current price level is 85% of the base-year level, so it is 100 − 85 = 15% lower. Therefore, option B is correct; 85% is the index value, not the decline.

Correct answer: C. ₹2,750 crore

Explanation: The GDP deflator formula is Deflator = (Nominal GDP ÷ Real GDP) × 100. Rearranging gives Nominal GDP = Real GDP × Deflator ÷ 100. Thus, Nominal GDP = 2,200 × 125 ÷ 100 = ₹2,750 crore. Therefore, option C is correct. Options A, B and D result from using an incorrect multiplier or making an arithmetic error.

Correct answer: B. 5 percent

Explanation: Inflation is calculated as the percentage change in the price index, not merely the difference between index numbers. Inflation rate = [(New deflator − Old deflator) ÷ Old deflator] × 100 = [(113.4 − 108) ÷ 108] × 100 = 5%. Therefore, option B is correct. The 5.4-point increase is not itself a 5.4% inflation rate.

Correct answer: A. About 6.3 percent fall

Explanation: Because the deflator equals nominal GDP divided by real GDP, compare their growth factors. The new deflator relative to the old one is 0.90 ÷ 0.96 = 0.9375. Hence the deflator changes by (0.9375 − 1) × 100 = −6.25%, approximately a 6.3% fall. Therefore, option A is correct; subtracting 10% − 4% gives only a rough, not exact, result.

Correct answer: B. 25 percent

Explanation: The percentage change must be calculated relative to the original deflator, not merely from the index-point difference. The increase is 100 − 80 = 20 points, and the percentage increase is (20 ÷ 80) × 100 = 25%. Therefore, option B is correct. Option A confuses points with percent, while C and D use incorrect bases or calculations.

Correct answer: B. 25 percent

Explanation: The decline is measured against the original deflator of 200. The index falls by 200 − 150 = 50 points. Hence, the percentage decline is (50 ÷ 200) × 100 = 25%. Option B is therefore correct. Option D treats the point fall as a percentage, while options A and C result from using an incorrect denominator.

Correct answer: C. 100

Explanation: By definition, the deflator in the base year is set to 100. In that year, nominal GDP is valued using the same prices that are used to calculate real GDP, so nominal GDP and real GDP are equal. Using the formula Deflator = (Nominal GDP ÷ Real GDP) × 100 gives 100. Therefore option C is correct; changing the base year resets the reference index.

Correct answer: C. 15 percent fall

Explanation: The percentage change in the price level is calculated as (new deflator − old deflator) ÷ old deflator × 100. Thus, (153 − 180) ÷ 180 × 100 = −15%. The negative sign indicates a fall, or deflation, so the price level decreased by 15%. Option A understates the change, option B uses an incorrect base, and option D gives only the absolute index-point fall, not the percentage fall.

Correct answer: B. It will fall by 18 percent

Explanation: The GDP deflator is nominal GDP divided by real GDP, multiplied by 100. Since real GDP stays constant, an 18% fall in nominal GDP changes the numerator by exactly 18% while the denominator is unchanged. Consequently, the deflator also falls by 18%. Option C incorrectly converts the change as though the denominator had changed, while A and D give the wrong direction or no change.

Correct answer: C. ₹2,400

Explanation: Real GDP measures current production using base-year prices, so it removes the effect of current price changes. For good A, the value is ₹16 × 75 = ₹1,200. For good B, it is ₹30 × 40 = ₹1,200. Adding both values gives ₹2,400. The distractors result from arithmetic errors or from using an incorrect price-quantity combination rather than valuing both current quantities at base prices.

Correct answer: C. ₹2,940

Explanation: Nominal GDP values current production at current prices. Using the given current quantities, good A contributes ₹20 × 75 = ₹1,500, while good B contributes ₹36 × 40 = ₹1,440. Their sum is ₹2,940. Real GDP would use base-year prices instead, so substituting ₹16 and ₹30 would answer a different question. The other options do not equal the correct sum of the two current-price values.

Correct answer: B. 122.5

Explanation: The GDP deflator is calculated as nominal GDP divided by real GDP, multiplied by 100. Substituting the values gives (₹2,940 ÷ ₹2,400) × 100 = 1.225 × 100 = 122.5. Thus, the correct index is 122.5. Option A or C may arise from rough estimation or an arithmetic mistake, while option D does not follow from the stated numerator and denominator.

Correct answer: A. They are not part of domestic gross production

Explanation: GDP measures the market value of final goods and services produced within a country’s domestic boundaries. Imported final goods may be purchased and consumed domestically, but they were produced abroad, so their prices are not part of the domestic-production price index used by the GDP deflator. They do have market prices, are not necessarily intermediate goods, and are not prohibited from the CPI.

Correct answer: B. Consumer price index

Explanation: The governing concept is the difference between domestic production coverage and household-consumption coverage. CPI can include imported goods when households buy them, and a large basket weight makes their price rise strongly influence CPI. The GDP deflator covers domestically produced final output and excludes imports as such. Real GDP is a quantity measure, while a population index is unrelated, so B is the only suitable answer.

Correct answer: B. 25 percent

Explanation: Use the percentage-change formula: [(new index − old index) ÷ old index] × 100. Here the change is 100 − 80 = 20 index points, and 20 ÷ 80 × 100 = 25%. The increase is not 20% because index points must be measured relative to the original value of 80. Therefore option B correctly states the price-level increase.

Correct answer: B. 25 percent

Explanation: The GDP deflator is an index of the price level, so the percentage change must be measured relative to the initial index. The decline is 200 − 150 = 50 points. Therefore, percentage decline = (50 ÷ 200) × 100 = 25%. Option B is correct. A 50-point fall is not a 50% fall because the original base is 200, while 33.3% incorrectly uses the final value as the base.