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Unformatted text preview: , we simply multiply the
quantity of X the country produces in each
year by the price it sells X for in the base
year. For example, the real GDP in 1990 is $4
times 40 units, which equals $160. The real
GDP in 1999 is $4 times 45 units, which
equals $180. The real GDP in 2005 is equal
to $4 times 40 units, which is $160. Notice
that the real GDP is the same in both 1990
You may be wondering how economists
decide what year will be the base year when
calculating real GDP. Unfortunately there is
no easy answer to this question. The base
year has to be a year in the past, but not too
far in the past. For example, no economist
would choose 1865 as a base year because
that is too long ago. The economic world
then was much different from today.
Economists generally want the base year to
be a year in the near past in which no major
economic events were occurring. They try
not to pick a year in which there were large
increases in prices or high unemployment.
Aside from those factors, however, choosing
the base ye...
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This document was uploaded on 01/16/2014.
- Winter '14