Question

(a)

Given the information in the table below (Table 1) for three consecutive years) in an economy, calculate the missing data in the table labelled (A) to (F). Also, show how you have worked out your answer for each missing value.

Table 1

Year	Nominal GDP ($ billion)	Real GDP (2018 $ billion)	GDP Deflator (2018 = 100)	Inflation	Real GDP per capita (2018 $)	Population (million)
2017	547.1	(A)	98.8	1.3	(B)	18.31
2018	(C)	540	(D)	1.2	(E)	18.52
2019	(F)	(G)	100.2	(H)	31471	18.75

(b) Government survey takers determine that the typical family expenditures each month in the year designated as the base year are as follows:

20 pizzas at $10 each

Rent of apartment, $600 per month

Petrol and car maintenance, $100

Phone service, $50

In the year following the base year, the survey takers determine that pizzas have risen to $11 each, apartment rent is $640, petrol and car maintenance has risen to $120, and phone service has dropped in price to $40.

i) Find the CPI in the subsequent year and the rate of inflation between the base year and the subsequent year.

ii) The family’s nominal income rose by 5 percent between the base year and the subsequent year. Are they worse off

or better off in terms of what their income is able to buy?

Answer 1

(a)

	$ billions	2018 $ billions	2018=100		2018 $	Million
Year	Nominal GDP	Real GDP	GDP Deflator	Inflation	Real GDP per capita	Population
2017	547	554 (A)	98.8	1.3	30243 (B)	18.31
2018	540 (C)	540	100 (D)	1.2	29158 (E)	18.52
2019	591 (F)	590 (G)	100.2	0.2 (H)	31471	18.75

(A) GDP deflator = ( Nominal GDP / Real GDP ) * 100 = ( 547 / Real GDP ) * 100

98.8 = 54700 / Real GDP

54700 / 98.8 = Real GDP = 554

(B) Real GDP per capita = Real GDP in Millions / Population =553744 / 18.31 = 30243

(C) as (D) is 100 because 2018 is the base year and thus GDP deflator for 2018 is 100. Thus (C) will be the same as Real GDP 540

(E) Real GDP per capita = 540000 / 18.52 = 29158

(F) One can find (G) first where Real GDP per capita = Real GDP * 1000 / Population

31471 = Real GDP * 1000 / 18.75

31471 * 18.75 = Real GDP * 1000

590081.25 / 1000 = Real GDP

590 = Real GDP

GDP Deflator = ( Nominal / Real GDP ) *100

100.2 = Nominal * 100 / 590

100.2 * 590 / 100 = Nominal

591 = Nominal GDP

(H) [ ( 100.2 / 100 ) - 1 ] * 100 = 0.2

(b)

2018
Price ($)	Quantity	Total ( P * Q)
10	240 (20*12)	2400
600	12	7200
100	12	1200
50	12	600
	Sum	11400

2019
Price ($)	Quantity	Total ( P * Q )
11	240	2640
640	12	7680
120	12	1440
40	12	480
	Sum	12240

(i) 2018 CPI is 100 as it is the base year. Thus CPI for 2019 is ( 12240 / 11400 ) * 100 = 1.074 * 100 = 107

Inflation is [ ( 107 / 100 ) - 1 ] * 100 = 7%

(ii) Families income rose by 5%. While the inflation rate rose by 7%. Thus inflation increase is more than the increase in income and thus they are worse off in terms of what their income is able to buy because goods have turned expensive by 7%, while their income has only increased by 5%. They they lose out 2% and are worse off.