Question

Explain the following well: • GDP deflator • CPI • PPI (WPI) • Inflation (and calculation method) • Linkage (formula) among nominal GDP, real GDP, and GDP deflator • Base year. • How do economists calculate the GDP deflator? Knowing the GDP calculator and Nominal GDP, how do they calculate the real GDP figures? • Explain and distinguish clearly the difference between nominal GDP and real GDP. Offer a clear numerical example to contrast the two better. • In the following table, calculate the nominal and real GDP figures for the three years: Year Quantity of Cars Price of cars Nominal GDP Real GDP (in 2000 dollars) 1999 10 $29,000 2000 12 $27,000 2001 15 $31,000 • How do economists measure the real GDP per capita? How about the growth rate of it?

Answer 1

The GDP deflator, also called implicit price deflator, is a measure of inflation.The formula to find the GDP price deflator:
GDP price deflator = (nominal GDP ÷ real GDP) x 100
2)Consumer Price Index (CPI) is based on the final prices of goods at the retail level. Because of the wide disparities in the consumption baskets for different segment of consumers
3)The PPI is a key economic measurement especially when it comes to inflation.The three things that make up the PPI are
* Commodity index
* Stage of processing index
* Industry index
4) Inflation is defined as a situation where there is sustained, unchecked increase in the general price level and a fall in the purchasing power of money. Thus, inflation is a condition of price rise. The reason for price rise can be classified under two main heads : (1) Increase in demand (2) Reduced supply.
5)Nominal GDP = ∑ ptqt

where p refers to price, q is quantity, and t indicates the year in question (usually the current year).
Real GDP = ∑ pbqt
where b denotes the base year.
To effectively compare the real GDP of two years, one can construct an index using a base year. A base year is usually an arbitrary figure which is used as a yardstick for comparison of the GDP numbers