Question

In: Economics

ountry of Fruitland can produce either apples or oranges. Annual output and market prices of apples...

  1. ountry of Fruitland can produce either apples or oranges.

Annual output and market prices of apples and oranges for the respective years are given in table below.

Let 2017 be the base year.

Suppose a representative consumer buys 10 apples and 20 oranges in a year.

Year

Price of Apples

Quantity of Apples

Price of Oranges

Quantity of Oranges

2017

$ 2

40

$ 5

50

2018

$ 3

50

$ 6

60

2019

$ 4

60

$ 7

70
  1. Compute the RGDP & NGDP for 2019.
  1. What is the GDP Deflator for 2018 & 2019?
  1. Compute the inflation rate for 2019 (using the GDP Deflator).
  1. What is the cost of CPI market basket in 2018 & 2019?
  1. What is the CPI for 2019?
  1. Compute the inflation rate for 2019 (using CPI).
  1. Give a reason why inflation rate is different between subpart C and F, if it is different at all.

Solutions

Expert Solution

Compute the RGDP & NGDP for 2019.

Nominal GDP in 2019=GDP at 2019 prices=4*60+7*70=$730

Real GDP in 2019=GDP at 2017 prices=2*60+5*70=$470

What is the GDP Deflator for 2018 & 2019?

Nominal GDP in 2018=GDP at 2018 prices=3*50+6*60=$510

Real GDP in 2018=GDP at 2018 prices=2*50+5*60=$400

GDP deflator for 2018=(NGDP/RGDP)*100=(510/400)*100=127.50

GDP deflator for 2019=(NGDP/RGDP)*100=(730/470*100=155.32

Compute the inflation rate for 2019 (using the GDP Deflator).

Inflation for 2019=(155.32-127.50)/127.50=21.82%

What is the cost of CPI market basket in 2018 & 2019?

Cost of CPI basket in 2018=3*10+6*20=$150

Cost of CPI basket in 2019=4*10+7*20=$180

What is the CPI for 2019?

Cost of CPI basket in 2017=2*10+5*20=$120

CPI for 2019=(Cost of basket in 2019/Cost for basket in 2017)*100=(180/120)*100=150

Compute the inflation rate for 2019 (using CPI).

CPI for 2018=(Cost of basket in 2018/Cost for basket in 2017)*100=(150/120)*100=125

Inflation for 2019=(150-120)/120=25.00%

Give a reason why inflation rate is different between subpart C and F, if it is different at all.

We observe that the inflation rate is different for both methods.

We know that CPI uses fixed quantities while GDP inflator uses fixed prices (base year prices). This distinction leads to different inflation rates.

Rahul Sunny answered 2 years ago
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