Calculate the Real GDP in 1987
Calculation:
Real GDP = Nominal GDP / GDP Deflator
Given data: Nominal GDP in 1987 = $350 billion, GDP deflator in 1988 = 1.25
Substitute the values into the formula:
Real GDP = $350 billion / 1.25 = $280 billion
Explanation:
To Calculate the Real GDP in 1987 using 1988 as the base year:
The GDP deflator is a measure of the average price level, so dividing the nominal GDP by the GDP deflator gives us the real GDP.
In this case, the nominal GDP in 1987 is $350 billion and the GDP deflator in 1988 is 1.25.
We adjust the nominal GDP to reflect 1988 prices to find the real GDP using the formula Real GDP = Nominal GDP / GDP Deflator.
Substituting the given values, we get Real GDP = $350 billion / 1.25 = $280 billion.
Conclusion:
Hence, the correct answer is a) $280 billion.