Does the choice of the base year tb affect the level of real

Does the choice of the base year tb affect the level of real GDP? Is this also the case for the growth rate of real GDP?

Shifts in the structure of the economy (e.g. increased usage of computers combined with a huge decline in the relative price of computers) can lead to overstated growth whenever real GDP is calculated through the \"fixed-base-year\" approach. As a result, the BEA is using a \"chain-weighted\" approach to overcome these issues. For the purpose of this exercise, focus on two periods of time t1 and t2 = t1 + 1. Then, we define the percentage increase in real GDP with base year tb as: Let the geometric average of gi and g2 be defined as g: /9192 which is also known as the \"Fisher index\" a. Why would a geometric mean be preferred over a simple arithmetic mean? Hint. Look up geometric mean on Wikipedia. b. For a given value of g, the chain-weighted approach constructs real GDP (denoted by GDP) at time t in terms of year dollars. More specifically, real GDP in year t e(t1. t2) denoted in year 11 dollars is equal to: GDpc1 - GDP Analogously, real GDP in year t e {ii,t2} in terms of year t2 dollars is defined as: GDpe2 GDp2

Solution

Yes choice of Base year affects level of real GDP but growth rate of real GDP is not Affected. Let us take an example let GDP in year 1 is 1000 and in year 2 is 2000.Then let us TAKE prices index of two separate years say 100 and 200,Now 1000/100=10 AND 2000/10=20 BUT 1000/200=5 AND 2000/200=10.SO ABSOLUTE VALUES CHANGE FROM 10 TO 5 IN YEAR 1 AND FROM 20 TO 10 IN YEAR 2.BUT NOTE GROWTH RATE FROM YEAR 1 TO 2 REMAINS 100% USING BOTH INDICES