Question

Suppose you are the following data on prices and quantities transacted:

Prices (EUR)
		Apples	Pears		Petrol
2006		1.0	2.0		5.0
2007		1.0	3.0		6.0
Quantities
	Apples			Pears		Petrol
2006	300			100		50
2007	400			150		40

If the economy produced all three (and only these three) goods, compute the nominal GDP in both periods and real GDP at 2006 prices. What is the rate of inflation in 2007, as measured by the change in the GDP deflator?

Suppose a CPI is constructed using weights corresponding to quantities produced in 2006. What is the rate inflation measured by the CPI?

Answer 1

The nominal GDP of 2006 and 2007 is given in the table below

	Apples			Pears			Petrol			GDP
Year	P	Q	Expenditure	P	Q	Expenditure	P	Q	Expenditure
2006	1	300	300	2	100	200	5	50	250	750	Nominal
2007	1	400	400	3	150	450	6	40	240	1090	Nominal
2007	1	400	400	2	150	300	5	40	200	900	Real

Then GDP deflator of 2006 is 100 because its is base year and nominal GDP is equal to real GDP for base year. The GDP deflator of 2007 is

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The cost of market basket in 2006 and 2007 is given below

	Apples			Pears			Petrol			Cost of market basket
Year	P	Q	Expenditure	P	Q	Expenditure	P	Q	Expenditure
2006	1	300	300	2	100	200	5	50	250	750
2007	1	400	400	3	150	450	6	40	240	1090
2007	1	300	300	3	100	300	6	50	300	900

The cost of market basket in 2007 was 900 and cost of market basket in base year is 750. then the CPI is