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Consider an economy that produces and consumes coffee, bread and auto- mobiles. In the following table,...

Consider an economy that produces and consumes coffee, bread and auto- mobiles. In the following table, we have data for two different years. The first 2 questions refer to this table.

	Year 2017	Year 2018
Price of 1 Automobile	$30,000	$30,500
Price of 1 loaf of Bread	$1.50	$1.60
Price of 1 cup of Coffee	$2.00	$2.20
Number of Automobiles Produced	1000	1100
Number of Loaves of Bread Produced	400,000	400,000
Number of Cups of Coffee Produced	100,000	0 105,000

1) Using the year 2017 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the GDP deflator (a Paasche price index) and the CPI (a Laspeyres price index. For the CPI, assume that the representative basket of goods is exactly the one produced in the year 2017

2) How high was the inflation rate between 2017 and 2018, based on the GDP deflator, and based on the CPI?

Expert Solution

For the year 2017,

Nominal GDP = 30000*1000 + 1.5*400000 + 2*100000 = 30800000

Real GDP = 30000*1000 + 1.5*400000 + 2*100000 = 30800000

Implicit price deflator = (Nominal GDP/ real GDP)*100 = 100

CPI = 30000*1000 + 1.5*400000 + 2*100000 = 30800000

For the year 2018,

Nominal GDP = 30500*1100 + 1.6*400000 + 2.2*105000 = 34421000

Real GDP = 30000*1100 + 1.5*400000 + 2*105000 = 33757500

Implicit price deflator = (Nominal GDP/ real GDP)*100 = (34421000/33757500)*100 = 101.96

CPI = 30500*1000 + 1.6*400000 + 2.2*100000 = 31360000

Inflation based on deflator = (101.96-100)/100 = 1.96%

Inflation based on CPI = (31360000-30800000)/30800000 = 0.018181 = 1.82%

Increase in price (using deflator) = (152-100)/100 = 52%

Value of basket in 2000 = 50000*100 + 10*500000 = $10000000

Value of basket in 2010 =60000*100 + 20*500000 = $16000000

Rise in price using the value of the basket = (16000000-10000000)/ 10000000 = 60%

Rahul Sunny answered 2 years ago

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