2. Consider an economy that produces and consumes bread and automobiles. In the following table are...

2. Consider an economy that produces and consumes bread and automobiles. In the following table are data for two different years.

	2000		2010
	Quantity	Price	Quantity	Price
Automobiles	100	$50000	120	$60000
Bread	500000	$10	400000	$20

(a) Using 2000 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the implicit price deflator for GDP, and a fixed-weight price index such as the CPI.

(b) How much did prices rise between 2000 and 2010? Compare the answers given by the Laspeyres and Paasche price indexes. Explain the difference.

(c) Suppose you are a senator writing a bill to index Social Security and federal pensions. That is, your bill will adjust these benefits to offset changes in the cost of living. Will you use the GDP deflator or the CPI? Why?

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Expert Solution

Rahul Sunny answered 1 year ago

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