Price of Butter 4 10 Guns Price of Butter Year 2005 80 2010

Price of Butter $4 10 Guns Price of Butter Year 2005 80 2010 90 Consider the above data for Tyrovia, a country that produces only two products: guns and butter. Real GDP for Tyrovia for 2005 using 2010 as the base year equals Produced 40 60 Produced Guns $5 O $1,140 $880 $690 $560 O None of these are correct

Solution

Real GDP is the inflation-adjusted output of the country for 2005.

Since 2010 is the base year, prices of 2010 should be multiplied with quantities of 2005 to get the required real GDP.

Real GDP of 2005 = (Quantity of G × Base year price) + (Quantity of B × Base year price)

                                    = (80 × $6) + (40 × $10)

                                    = $480 + $400

                                    = $880

Answer: 2^nd option