At the end of World War II in 1945, many economists and business ...

[RRMR]

At the end of World War II in 1945, many economists and business managers expected that the U.S. economy would enter a severe recession. At that time, Sears and Montgomery Ward were the two largest department store chains in the country.
 
  Sears CEO Robert Wood expected continuing prosperity and opened new stores. Montgomery Ward CEO Sewell Avery expected falling incomes and rising unemployment and closed a number of existing stores. The results of their actions were seen during the late 1940s, when
  A) Sears declared bankruptcy and was purchased by Montgomery Ward.
  B) Montgomery Ward weathered the economic downturn in better financial shape than Sears.
  C) Sears had to close many of the new stores it had opened following the end of the war.
  D) Sears rapidly gained market share at Montgomery Ward's expense.

Question 2

Refer to Table 19-24. Suppose that a very simple economy produces three goods: pizzas, haircuts, and backpacks. Suppose the quantities produced and their corresponding prices for 2011 and 2016 are shown in the table above.
 
  Use the information to compute real GDP in the year 2011 and 2016. Calculate real GDP in 2016 assuming the base year is 2011. Do the same calculation assuming the base year is 2016. Are the calculations different? Why?

[Swizqar]

Answer to Question 1

D

Answer to Question 2

Recall that real GDP is found by valuing GDP in a particular year using base year prices. When 2011 is the base year, real GDP for 2016 is found by multiplying 2011 prices by 2016 quantities and then adding the values up. The individual values for 2016 (2011 is the base year) are calculated in the following table:

Product Quantity Price Value
Pizzas 120 10 1,200
Haircuts 45 15 675
Backpacks 210 40 8,400

Therefore, Real GDP for 2016 (2011 base year) =
Quantity of pizza in 2016  price of pizza in 2011 = 1,200
Quantity of haircuts in 2016  price of haircuts in 2011 = 675
Quantity of backpacks in 2016  price of backpacks in 2011 = 8,400
Total 10,275.

The individual values for 2016 (2016 base year) are calculated in the following table:

Product Quantity Price Value
Pizzas 120 12 1,440
Haircuts 45 20 900
Backpacks 210 45 9,450

Therefore, Real GDP for 2016 (2016 base year) =
Quantity of pizza in 2016  price of pizza in 2016 = 1,440
Quantity of haircuts in 2016  price of haircuts in 2016 = 900
Quantity of backpacks in 2016  price of backpacks in 2016 = 9,450
Total 11,790.

When 2016 is used as the base year, the calculation of real GDP is larger as compared to the calculation of real GDP for 2016 assuming 2011 is the base year. The values differ because the prices are different in 2011 and 2016, so the value of real GDP does depend on the chosen base year. However, since we use the same base year prices for every year when we calculate a GDP series, we can still compare real GDP across the different years.