Question

Table 2w

The country of Caspir produces only cereal and milk. Quantities and prices of these goods for the last several years are shown below. The base year is 2008.

Prices and Quantities

Year	Price of Cereal	Quantity of Cereal	Price of Milk	Quantity of Milk
2008	$4.00	1000	$1.50	1110
2009	$4.00	1500	$2.00	1290
2010	$5.00	1600	$2.50	2020
2011	$6.00	1500	$3.50	2200

1. Refer to Table 2. For 2010, calculate the (1) real GDP and (2) the GDP Deflator.

2. Refer to Table 2. For 2011, calculate the (1) real GDP and (2) the GDP Deflator.

3. Refer to Table 2. Calculate the country’s inflation rate from 2010 to 2011.

Answer 1

(i)

Real GDP is the market value of goods and services produced in the economy during the accounting year measured in Constant prices or Base year prices.

Here Base Year is 2008 and hence we have to use Prices of 2008 in order to calculate real gdp in 2010

Hence Real GDP in 2010 is the sum of products of Price and quantity of all goods where quantities are of 2010 and prices are of 2008.

Hence Real GDP in 2010 = 4*1600 + 1.5*2020 = 9430

Nominal GDP is the market value of goods and services produced in the economy during the accounting year measured in Current prices

hence we have to use Prices of 2010 in order to calculate Nominal GDP in 2010

Hence Nominal GDP in 2010 is the sum of products of Price and quantity of all goods where quantities are of 2010 and prices are of 2010.

Hence Real GDP in 2010 = 5*1600 + 2.5*2020 = 13050

GDP Deflation = (Nominal GDP/Real GDP)*100

=> GDP Deflator in 2010 = 13050/9430)*100 = 138.39

(ii)

Here Base Year is 2008 and hence we have to use Prices of 2008 in order to calculate real gdp in 2011

Hence Real GDP in 2011 is the sum of products of Price and quantity of all goods where quantities are of 2011 and prices are of 2008.

Hence Real GDP in 2011 = 4*1500 + 1.5*2200 = 9300

Nominal GDP is the market value of goods and services produced in the economy during the accounting year measured in Current prices

hence we have to use Prices of 2011 in order to calculate Nominal GDP in 2011

Hence Nominal GDP in 2011 is the sum of products of Price and quantity of all goods where quantities are of 2011 and prices are of 2011.

Hence Real GDP in 2011 = 4*1500 + 1.5*2200 = 16700

GDP Deflation = (Nominal GDP/Real GDP)*100

=> GDP Deflator in 2011 = (16700/9300)*100 = 179.57

(ii)

Inflation rate = % growth of price index = % growth of GDP Deflator = ((179.57 - 138.39)/138.39)*100 = 29.76%

Hence, Inflation rate = 29.76%