Question

In: Economics

An economy produces and consumes only two products: college education and economic textbooks. The following table...

An economy produces and consumes only two products: college education and economic textbooks. The following table gives the appropriate data for two different years.

2005

2008

Price of College Education

$10,000

$15,000

Quantity of College Education

50

60

Price of Economics Textbooks

$100

$125

Quantity of Economics Textbooks

20

25

            Using the above table, compute the following and show your calculations

           

Nominal GDP for 2005 and 2008.

Real GDP for 2008 using 2005 as the base year.

The GDP Deflator for 2008.

The CPI index for 2005 and 2008 using 2005 as the base year.

The inflation rate from 2005 to 2008 based on the CPI.

Solutions

Expert Solution

2005 (Base Year)

2008

Quantity

Price

Value

Quantity

Price

Value

College Education

50

10,000

500000

60

15,000

900000

Economics Textbooks

20

100

2000

25

125

3125

Nominal GDP

10,100

502000

15,125

903125

1. Nomial GDP = Units of output*Price per unit

2005

502000

2008

903125

2. Real GDP of 2008 if base year is 2005

Real GDP = Units of output*price of base year

2008

Quantity

Price of
base year

Value

60

10,000

600000

25

100

2500

REAL GDP

602500

3. GDP Deflator for 2008

GDP Deflator = Nominal GDP/Real GDP *100

903125/602500*100= 149.89

4. The CPI index for 2005 and 2008 using 2005 as the base year.

CPI index for base year (2005) will be always 100

CPI index for 2008

Price of market basket of 2008/price of market basket of 2005*100

15,125/10,100*100 = 149.75

5. The inflation rate from 2005 to 2008 based on the CPI.

Inflation = CPI in 2008 - CPI in 2005/CPI in 2005*100

149.75-100/100*100 = 49.75%


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