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20 March, 19:12

Let's say that our country produces only bread and apples (both final goods). In year 1, we produce 10 loaves of bread at $3 each, and 20 apples at $1 each. In year 2, we produce 8 loaves of bread at $2 each, and 25 apples at $1.25 each. Using year 1 as the base year (for constant prices), what is real GDP in year 1 and real GDP in year 2?

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  1. 20 March, 19:40
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    Year 1 Real GDP = $50

    Year 2 Real GDP = $49

    Explanation:

    Real GDP expresses the value of all goods and services produced in an economy in a given year, expressed in base year prices.

    In Year 1:

    Bread: 10 loaves x $3 = $30

    Apples: 20 apples x $1 = $20

    Real GDP in Year 1: $30 + $20 = $50

    In Year 2:

    Bread: 8 loaves x $3 = $24

    Apples: 25 apples x $1 = $25

    Real GDP in Year 2 = $24 + $25 = $49

    Note that in Year 2, although we use the quantities from Year 2, we use prices from the base year (Year 1).
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