In year 1, the price of goods x, y, and z are $2, $4, and $6 per unit respectively. In year 2, the price of goods x, y, and z are $3, $4, and $7 per unit respectively. In year 2, twice as many units of each good are produced as in year 1. In year 1, 20 units of x, and 60 units of z are produced. If year 1 is the base year, what does Real GDP equal in year 2?

Answer:

Note: quantity of Y produced in year 1 is not mentioned. Thus, it is assumed to be 40 in year 1.

As per the question,

Price of X in base year =$2

Price of Y in base year = $4

Price of Z in base year = $6

Quantity of X produced in year 2 = 2*20 = 40

Quantity of Y produced in year 2 = 2*40 = 80      (Assumed)

Quantity of Z produced in year 2 = 2*60 = 120

Real GDP in year 2 = Price of X in base year* Quantity of X produced in year 2 + Price of Y in base year* Quantity of Y produced in year 2 + Price of Z in base year* Quantity of Z produced in year 2

Real GDP in year 2 =2*40+4*80+6*120

Real GDP in year 2 = $1120