1. Calculate real GDP for 2004 and 2005 using 2004 prices. To calculate the real GDP we use the constant price for 2004 which was $20.
Real GDP (base year 2004)
2004 ($20 per CD x 100 CD's) + ($110 per racquet x 200 racquets) = 24000
2005 ($20 per CD x 120 CD's) + ($110 per racquet x 210 racquets) = 25500
By what percentage did real GDP grow? Because the Real GDP was $24000 in 2004 and $25500 in 2005, real GDP grew by ($25500 - $24000) / $24000 = 0.0625 or 6.25%
2. Calculate the value of the price index for GDP for 2005 using 2004 as the base year. If we use 2004 as the base year we come up with the following calculations:
GDP Deflator Base year 2004
2004 ($24000 Nominal 2004/ $24000 Real 2004 (base 2004)) x 100 = 100
2005 ($27840 Nominal 2005/ $25500 Real 2005 (base 2004)) x 100 = 109
By what percent did prices increase? The value of the price index for 2005 is 109. Because the GDP Deflator in 2005 is 109, and was 100 in the base year (2004) the increase in price is (109-100) /100 = 0.9 or 9%.
3. Now calculate the real GDP for 2004 and 2005 using 2005 prices. To calculate the real GDP we use the constant price for 2005 which was $22.
Real GDP (base year 2005)
2004 ($22 per CD x 100 CD's) + ($120 per racquet x 200 racquets) = 26200
2005 ($22 per CD x 120 CD's) + ($120 per racquet x 210 racquets) = 27840
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