Reading 14 Question 9 (help!)

If the GDP deflator values for year 1 and year 2 were 190 and 212.8, respectively, which of the following best describes the annual growth rate of the overall price level?

A 5.8%.

B 6%.

C 12%

The correct answer is: (212.8/190)1/2 – 1 = 0.0583 or 5.8%.

However I think this is to simply compare the price of year 1 and year 2, so it should be 212.8/190 - 1 =12%

Although year 1 price compared with the base year price (we don’t know which year, not necessarily year 0, it could be year -5 for example) is an increase of 90%, and year 2 price compared with the base year price is an increase of 112.8%. To calculate annual price growth rate, shouldn’t I just compare year 1 and year 2? Why is there a square root?

Thank you very much!

You’re correct.

Where did you get this question?

It’s from the textbook Reading 14 Practice Problems (Economics)

Check the errata.

All sorted! I spent 30 minutes thinking my head off…thank you so much for your kind help!!

My pleasure.

Hi! Is the A the correct answer? I am also thinking 12%. :frowning:

Read the erratum.

According to the errata, it should be “year 1 and year 3”.

There you go.

Got it! Thank you!

Thank you!!

Question little bit incorrectly was written — > based on old cirriculum this question was written like that : GDP deflator 2008 (190) and 2010 (212.8) … So, this mean that you need to count growth for two years (2008 vs 2009 & 2009vs2010), 212.8/190^1/2 (years growth) - 1 = 5.83%

Can you please explain why is there a square root in this case? I dont really get the formula. Thank you

If two years separate the deflators, you use a square root to get the annual change.

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