Question

The table below provides information about price and output produced in country X for the years 2010 and 2015. The base year is 2010.

                                                            p2010              y2010              p2015             y2015

Clothing                                              20                    100                  20                    150

Food                                                   10                    50                    12                    60

Government pension payments        75                    500                  100                  750

Military equipment                            250                  750                  250                  800

1. Using the GDP deflator, determine whether inflation or deflation occurred during the period. Enter the value of the GDP deflator and the inflation or deflation rate.

2. Enter the percent change in the value of production over the period.

3. Enter the value of government purchases in 2015 as a percentage of RGDP

Answer 1

a) Nominal GDP in 2010 = price of clothing in 2010 * quantity of clothing in 2010 + price of food in 2010 * quantity of food in 2010 +  price of government pension payment in 2010 * quantity of government pension payment in 2010 + price of military equipment in 2010 * quantity of military equipment in 2010 = 20 * 100 + 10 * 50 + 75 * 500 + 250 * 750 = 227,500

Nominal GDP in 2015 = price of clothing in 2015 * quantity of clothing in 2015 + price of food in 2015 * quantity of food in 2015 +  price of government pension payment in 2015 * quantity of government pension payment in 2015 + price of military equipment in 2015 * quantity of military equipment in 2015 = 20 * 150 + 12 * 60 + 100 * 750 + 250 * 800 = 278,720

Real GDP in 2010 = Nominal GDP in 2010 price of clothing in 2010 * quantity of clothing in 2010 + price of food in 2010 * quantity of food in 2010 +  price of government pension payment in 2010 * quantity of government pension payment in 2010 + price of military equipment in 2010 * quantity of military equipment in 2010 = 20 * 100 + 10 * 50 + 75 * 500 + 250 * 750 = 227,500

Real GDP in 2015 = price of clothing in 2010 * quantity of clothing in 2015 + price of food in 2010 * quantity of food in 2015 +  price of government pension payment in 2010 * quantity of government pension payment in 2015 + price of military equipment in 2010 * quantity of military equipment in 2015 = 20 * 150 + 10 * 60 + 75 * 750 + 250 * 800 = 259,850

GDP defltor in 2010 = Nominal GDP in 2010 / Real GDP in 2010 = 1

GDP defltor in 2015 = Nominal GDP in 2015 / Real GDP in 2015 = (278,720 / 259,850) = 1.0726 which is 7.26% of inflation from 2010 to 2015

b) %change in production is change in nominal GDP which is [(278,720 - 227,500) / 227,500] * 100 = 1.2251 which is 22.51%

c) %of government purchase in 2015 of RGDP = (Expenditure on miltary equipment / RGDP in 2015) = (200,000 / 259,850) * 100 = 76.96% which can be rounded to 77%