The value of the nominal GNP of an economy was Rs 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the prices of same base year, was Rs 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Has the price level risen between the base year and the year under consideration?
Given: Nominal GNP = Rs 2,500 crores Real GNP = Rs 3,000 crores
Step 1: Identify the formula for GNP Deflator GNP Deflator = (Nominal GNP / Real GNP) × 100
Step 2: Substitute the values GNP Deflator = (2,500 / 3,000) × 100
Step 3: Calculate GNP Deflator = = 83.33%
Conclusion: The GNP deflator is 83.33%. Since the deflator is less than 100%, the price level has not risen but has actually fallen between the base year and the year under consideration. The prices in the current year are approximately 83.33% of the prices in the base year.
Explanation
The textbook explains that the ratio of nominal GDP to real GDP gives us an idea of how prices have moved from the base year to the current year. This ratio is called the GDP Deflator (or GNP Deflator when applied to GNP). When expressed in percentage terms, deflator = (Nominal/Real) × 100. A deflator greater than 100% indicates prices have risen compared to the base year, while a deflator less than 100% indicates prices have fallen. In this case, since Nominal GNP (Rs 2,500 cr) is less than Real GNP (Rs 3,000 cr), the deflator comes out to 83.33%, indicating a fall in price level.
Solution Steps
Step 1: Identify formula - GNP Deflator = (Nominal GNP / Real GNP) × 100
Step 2: Substitute values - GNP Deflator = (2,500 / 3,000) × 100
Step 3: Calculate - GNP Deflator = 83.33%
Step 4: Interpret - Since 83.33% < 100%, price level has fallen, not risen