Question

1. We discussed two price indexes, the Consumer Price Index (CPI) being an example of an index that has fixed quantity weights from the base period and the GDP Deflator being an example of an index that has current quantity weights. Suppose we have an economy in which there are only three goods produced and consumed: rice, electricity, and cellphones. The prices and quantities for the years 2018 and 2019 are given in the following table:

2018
Rice		Electricity		Cellphones
Quantity	Price	Quantity	Price	Quantity	Price
8200	$2	200	$60	70	$240
2019
Rice		Electricity		Cellphones
Quantity	Price	Quantity	Price	Quantity	Price
8100	$3	210	$62	65	$250

1. 1.1) Determine the equivalent of current dollar GDP for this economy in 2018 and in 2019. What was the percentage change in nominal GDP from 2018 to 2019?

1. 1.2) Determine the equivalent of the CPI (use 2018 as the base) for 2018 and for 2019 in this economy.

1. 1.3) Compute the equivalent of the GDP deflator (again use 2018 as the base) for 2018 and 2019 in this economy.

1. 1.4) Compute the rate of price increase from 2018 to 2019 using the two different price indexes.

1. 1.5) If 2018 is the base period determine the equivalent of 2019 GDP in constant 2018 dollars for this economy. What was the percentage change in real GDP from 2018 to 2019?

1. 1.6) Based on your answer to Question 1.5, what do you think is likely to have happened to unemployment rates between 2018 and 2019? How does this relate to your result in Question 1.1?

The question has all the given information.

Answer 1

1.1)

Nominal GDP for year 2018= (8200*2 + 200*60 + 70*240 ) = $ 45,200
Nominal GDP for year 2019= (8100*3 + 210*62 + 65*250) = $ 53,570

Growth rate = ( V ending – V beginning) / V beginning

         Rate of growth of nominal GDP from year 2018 to year 2019 = (53,570-45,200)/45,200 =18.52 %

1.2) CPI index = (current price value of basket/price value of basket in base year) x100

2018 as base year
CPI in 2018 = (8200*2 + 200*60 + 70*240 ) / (8200*2 + 200*60 + 70*240 )= (45,200 / 45,200) *100 = 100
CPI in 2019 = (8200*3 + 200*62 + 70*250 )  / (8200*2 + 200*60 + 70*240 )  = (54,500 / 45,200) *100 = 120.58

1.3) Using year 2018 as the base year
Real GDP for year 2018= (8200*2 + 200*60 + 70*240 ) = $ 45,200
Real GDP for year 2019= (8100*2 + 210*60 + 65*240) = $ 44,400

2018 as base year
GDP Deflator =(Nominal GDP / Real GDP) *100
GDP Deflator for year 2018= (45,200/45,200) *100 = 100
GDP Deflator for year 2019= (44,400/45,200) *100 = 98.23

1.4) Rate of inflation = (CPI_x+1 - CPI_x) / CPI_x  
Inflation rate between from 2018 to 2019 = (120.58-100)/100 = 20.58%

Inflation from 2018 to 2019 = (2019 Deflator – 2018 Deflator) / 2018 Deflator
       = (98.23-100)/100 = -1.77%