Question

The economy of Tuland produces only two products books and watches. The following information is available for production and prices of​ Tuland's products for the years 2009 and 2010.

	2009	2010
Quantity of booksbooks	200	240
Quantity of watcheswatches	60	75
Price of booksbooks	​$10.00	​$11.50
Price of watcheswatches	​$20.00	​$22.00

Using the above​ information, calculate the following values. (Enter your responses rounded to two decimal​ places.)

1. GDP for 2009 in​ 2009's prices	​
2. GDP for 2009 in​ 2010's prices	​
3. GDP for 2010 in​ 2009's prices	​
4. GDP for 2010 in​ 2010's prices	​
5. Using 2009 as the base​ year, compute the percentage change in the price​ level, i.e. the inflation rate. ​hint: you need to compute the GDP deflator first.
6. Using 2010 as the base​ year, compute the percentage change in the price​ level, i.e. the inflation rate. hint: you need to compute the GDP deflator first.
7. The geometric average of the two inflation rates

Answer 1

Solution:

(1). GDP for 2009 in 2009 prices= quantity of books in 2009 * price of books in 2009 + quantity of computer software in 2009 * price of computer software in 2009

= 200 * 10 + 60 * 20

= 2000 + 1200

=3200

So the real GDP in 2009 using 2009 as the base year is $3200

(2). GDP for 2009 in 2010 prices= quantity of books in 2009 * price of books in 2010 + quantity of computer software in 2009 * price of computer software in 2010

= 200 * 11.50 + 60 * 22

= 2300 + 1320

=3620

So the real GDP in 2009 using 2010 as the base year is $3620

(3). GDP for 2010 in 2009 prices= quantity of books in 2010 * price of books in 2009 + quantity of computer software in 2010 * price of computer software in 2009

= 240 * 10 + 75 * 20

= 2400 + 1500

=3900

So the real GDP in 2010 using 2009 as the base year is $3900

(4). GDP for 2010 in 2010 prices= quantity of books in 2010 * price of books in 2010 + quantity of computer software in 2010 * price of computer software in 2010

= 240 * 11.50 + 75 * 22

= 2760 + 1650

=4410

So the real GDP in 2010 using 2010 as the base year is $4410

(5). Using 2009 as the base​year

GDP deflator = GDP 2010 / GDP 2010 in 2009 price * 100

                      = 4410 / 3900 * 100

                      = 113.08

(6). Using 2010 as the base​year

GDP deflator = GDP 2010 / GDP 2009 in 2010 price * 100

                      = 4410 / 3620 * 100

                      = 121.82

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