Question

$$\begin{array}{lcc}\text{ Quantities }& 2012& 2013\\ \text{ Apples }& 60& 160\\ \text{ Oranges }& 80& 220\\ \text{ Prices }& 2012& 2013\\ \text{ Apples }& \mathrm{\$}0.50& \mathrm{\$}1.00\\ \text{ Oranges }& \mathrm{\$}0.25& \mathrm{\$}2.00\end{array}$$ Calculate real GDP in 2012 and 2013 expressed in base-year prices.

Short answer

The real GDP for 2012 is 50 dollars and for 2013 it is 135 dollars, in base-year prices.

Step-by-step solution

Identify Base Year

Choose 2012 as the base year. This means all quantities will be valued at 2012 prices.

Calculate 2012 Real GDP

To calculate the real GDP for 2012 at base-year prices, multiply the quantity of each item by its price in 2012.For Apples: $60\text{ apples}\times 0.50=30\text{ dollars}\text{for}Oranges:$ $80\text{ oranges}\times 0.25=20\text{ dollars}$ Add the totals together:$30+20=50\text{ dollars}$

Calculate 2013 Real GDP

To calculate the real GDP for 2013 at base-year prices, also multiply the quantity of each item by its price in 2012.For Apples: $160\text{ apples}\times 0.50=80\text{ dollars}\text{or}Oranges:$ $220\text{ oranges}+=0.25=55\text{ dollars}$ Add the totals together:$80+55=135\text{ dollars}$

Conclusion

The real GDP for 2012 expressed in base-year prices (2012) is 50 dollars. The real GDP for 2013 expressed in base-year prices (2012) is 135 dollars.

Key concepts

Base-Year Prices

Understanding base-year prices is crucial in calculating real GDP. When we talk about base-year prices, we refer to the prices of goods and services in a specific year chosen as the base. This base year provides a consistent price level to compare different years.
Imagine base-year prices as a common measuring stick. By keeping the prices constant, we can better compare economic growth over time without the noise of inflation or deflation. In our exercise, 2012 is chosen as the base year. All quantities of goods in different years will be valued using 2012 prices.
This means whether we're looking at 2012 or 2013 production, we always use 2012 prices to calculate real GDP. It helps provide a clearer picture of production changes without the influence of price changes.

Quantities

Quantities represent the number of goods produced and sold. They are key to calculating real GDP. Fluctuations in quantities can indicate economic growth or decline.
For example, in our exercise, the quantity of apples increased from 60 in 2012 to 160 in 2013, and oranges from 80 to 220. These numbers tell us that more apples and oranges were produced and sold in 2013 compared to 2012.
When calculating real GDP, we multiply these quantities by the base-year prices. By doing this, we isolate the effect of production changes, ignoring any price changes over the years. This helps us understand the actual growth in the number of goods produced.

Price Levels

Price levels refer to the average of current prices across the entire spectrum of goods and services produced in the economy. They can fluctuate due to various factors like demand, supply, and inflation.
In our exercise, the price level of apples increased from $0.50in2012to$1.00 in 2013, and for oranges from $0.25to$2.00. Despite these changes, we use the base-year prices (prices from 2012) in our real GDP calculation. Doing so eliminates the impact of inflation.
By fixing the prices at the base year, we can solely focus on the changes in quantity, which is crucial when assessing economic growth. This approach provides a more accurate measure of production and economic performance over time.

Economic Comparison

An economic comparison aims to evaluate the economic performance of different years or periods. Using real GDP calculated with base-year prices is particularly helpful in such comparisons.
In our example, comparing the real GDP of 2012 and 2013 using base-year (2012) prices shows growth from $50to$135. This comparison tells us that production increased significantly without the distortion of price changes.
Real GDP gives a more reliable basis for economic comparison as it focuses on actual production levels. It helps policymakers, economists, and analysts understand the underlying economic conditions and make informed decisions.
To summarize, using real GDP and base-year prices are fundamental tools for making meaningful economic comparisons and assessing true economic progress.