Question

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.

Answer 1

	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%