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Interpreting Economic Growth Data
An economy produces only apples and oranges. The table below shows the prices and quantities produced for two consecutive years, using Year 1 as the base year for prices.
| Year | Good | Quantity | Price per unit |
|---|---|---|---|
| 1 | Apples | 100 | $1.00 |
| 1 | Oranges | 50 | $2.00 |
| 2 | Apples | 105 | $1.20 |
| 2 | Oranges | 50 | $2.50 |
Based on the data, explain why the growth in the total market value of output from Year 1 to Year 2 gives a potentially misleading impression of the actual change in production. How does using constant base-year prices provide a more accurate measure?
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Related
Consider a simple economy that only produces one good: widgets. In the base year (Year 1), 100 widgets were produced and sold for $10 each. In Year 2, 110 widgets were produced and sold for $12 each. Which of the following statements correctly analyzes the change in the economy's output between Year 1 and Year 2?
Analyzing Economic Performance
An economy's production of goods and services remains identical between two consecutive years. However, the average price of these goods and services increases by 3%. In this scenario, the economy's output measured at constant prices will also show a 3% increase.