Question

In: Economics

Suppose that a simple economy produces only nachos, tacos, tortilla chips and beer. Assume all tortilla chips...

Suppose that a simple economy produces only nachos, tacos, tortilla chips and beer. Assume all tortilla chips are used in the production of nachos.

	Quantity in 2013	Price in 2013	Quantity in 2014	Price in 2014	Quantity in 2015	Price in 2015
Nachos	100	$4	120	$5	120	$4
Tacos	200	$2	250	$2	250	$3
Beer	200	$5	250	$4	250	$6
Tortilla Chips	1000	$2	1200	$2	1400	$3

a. Use the table to calculate nominal GDP, real GDP, and the GDP price index for each year. Use 2014 as the base year.

b. Did production increase more between 2013-2014 or 2014-2015? Explain

c. Did prices increase more between 2013-2014 or 2014-2015? Explain.

Expert Solution

We have the following information

Year	Nachos		Tacos		Beer		Tortilla Chips		Nominal GDP ($)
Year	Price ($)	Quantity	Price ($)	Quantity	Price ($)	Quantity	Price ($)	Quantity	Nominal GDP ($)
2013	4.0	100.0	2.0	200.0	5.0	200.0	2.0	1,000.0	3,800.0
2014	5.0	120.0	2.0	250.0	4.0	250.0	2.0	1,200.0	4,500.0
2015	4.0	120.0	3.0	250.0	6.0	250.0	3.0	1,400.0	6,930.0

Consumer Price Index (CPI) = (Ʃp1q0/Ʃp0q0) × 100

In the above, p1 is the current year price; p0 is base year price; q0 is base year quantity. In the present case the base year is 2014.

Commodity	q0 (2014)	p0 (2014)	p1 (2013)	p1q0	p0q0
Nachos	120.0	5.0	4.0	480.0	600.0
Tacos	250.0	2.0	2.0	500.0	500.0
Beer	250.0	4.0	5.0	1,250.0	1,000.0
Tortilla Chips	1,200.0	2.0	2.0	2,400.0	2,400.0
Total				4,630.0	4,500.0

CPI for 2013 = (4630/4500) × 100 = 102.9

Commodity	q0 (2014)	p0 (2014)	p1 (2015)	p1q0	p0q0
Nachos	120.0	5.0	4.0	480.0	600.0
Tacos	250.0	2.0	3.0	750.0	500.0
Beer	250.0	4.0	6.0	1,500.0	1,000.0
Tortilla Chips	1,200.0	2.0	3.0	3,600.0	2,400.0
Total				6,330.0	4,500.0

CPI for 2015 = (6330/4500) × 100 = 140.7

Year	Nominal GDP ($)	CPI	Real GDP
2013	3,800.0	102.9	3,692.9
2014	4,500.0	100.0	4,500.0
2015	6,930.0	140.7	4,925.4

So, while the price level declined during 2013-14, it increased during 2014-15

Year	Production	Percentage Increase
2013	1500	--
2014	1820	21.3%
2015	2020	11.0%

So, production has increased more during 2013-14 as compared to 2014-15

Rahul Sunny answered 2 years ago

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