Which of the following is TRUE regarding the chain-weighted output index method? I. It is the method used to measure the growth rate of nominal GDP. II. It uses data from the current year and from the previous year. III. It is a method of measuring the growth rate of real GDP. A) I and II B) II and III C) I and III D) I, II and III
The correct answer and explanation is :
The correct answer is B) II and III.
Explanation:
The chain-weighted output index method is primarily used to measure the growth rate of real GDP. Let’s analyze each statement:
I. It is the method used to measure the growth rate of nominal GDP.
This statement is false. The chain-weighted output index method is specifically used to measure real GDP, not nominal GDP. Nominal GDP is the total value of goods and services produced in an economy, measured at current prices, while real GDP adjusts for inflation, allowing for a more accurate measurement of the economy’s growth over time by using constant prices from a base year. The chain-weighted index is used to measure real GDP because it adjusts for changes in both the quantity and quality of goods produced.
II. It uses data from the current year and from the previous year.
This statement is true. The chain-weighted method does use data from both the current year and the previous year. It involves linking together annual price indices (or outputs) from one year to the next in a chain-like fashion. This approach reflects the most recent changes in prices and quantities, avoiding the distortions that could arise if a fixed base year were used for comparison. The chain-weighted method is considered to provide a more accurate representation of real GDP growth than traditional methods because it adjusts for changes in relative prices across different years.
III. It is a method of measuring the growth rate of real GDP.
This statement is true. The chain-weighted output index method is designed specifically to measure the growth rate of real GDP. By using a chain index that adjusts for inflation and updates weights each year, this method provides a more dynamic and accurate picture of economic growth. Unlike fixed-base methods, it better captures changes in consumption patterns and technological improvements, as it reflects the most current data.
Conclusion:
Since statement II and III are correct and statement I is incorrect, the correct answer is B) II and III.