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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
Interpreting Economic Growth Data
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.