Question

Table contains some data about the economy of Potsteel. Assume that this is a complete record of the economy. Some parts of this question ask for numerical solutions. You must include both the final answer, and how you found that answer

Year	Quantity of Potatoes Produced	Price of Potatoes	Quantity of Steel Produced	Quantity of Steel Exported	Price of Steel	Unemployment Benefit
2016	100	1	200	100	2	200
2017	110	1.1	210	80	2.1	160
2018	90	1.1	180	60	1.8	300
2019	140	1.2	250	40	2	220

Calculate the GDP deflator for 2017 to 2019, taking 2016 as the base year. Find the percentage change in GDP deflator for 2017 to 2019

Answer 1

(a) GDP deflator for 2017 to 2019, taking 2016 as the base year-

GDP Deflator is the ratio of Nominal GDP and Real GDP multiplied by 100. It is a way to measure inflation in an economy.

The following is the formula for calculating the GDP deflator

In this case, when calculating GDP-

Unemployment benefits are not added

Step 1) Nominal GDP-

Nominal GDP can be defined as the gross domestic product which is calculated at the market prices currently prevailing in an economy. It does not take inflation into consideration.

If the goods are produced in 2017, then the Nominal GDP is calculated as-

where Q is the Quantity of the good produced in 2017 and P is the price of the good in 2017.

For the given data, Nominal GDP is calculated as follows

Year	Calculation (Q * P of potatoes + Q* P of steel)	Nominal GDP
2016 (base year)	(100*1)+(200*2)	300
2017	(110*1.1)+(210*2.1)	562
2018	(90*1.1)+(180*1.8)	423
2019	(140*1.2)+(250*2)	668

Step 2)Real GDP-

Gross domestic product calculated after adjusting the prices for inflation is called the Real GDP. The value of the goods for all the years are calculated using the base price. Only the quantity taken is of the respective year.

If the base year is 2016 and the Real GDP is to be calculated for the year 2017, then-

where Q is the Quantity of the good produced in 2017 and P is the price of the good in 2016, that is the base year.

Year	Calculation (Q * P of potatoes + Q* P of steel)	Real GDP
2016 (base year)	(100*1)+(200*2)	300
2017	(110*1)+(210*2)	530
2018	(90*1)+(180*2)	450
2019	(140*1)+(250*2)	640

Note- The Nominal GDP and Real GDP are the same for the base year. Here the base year is 2016

Step 3) GDP Deflator-

Year	Calculation	GDP Deflator
2017	(562/530)*100	106.03
2018	(423/450)*100	94
2019	(668/640)*100	104.37

Thus the GDP deflator for 2017 and 2019 shows inflation in the economy ( as the nominal GDP is more than the Real GDP for these years) and for 2018, it shows that the economy experienced deflation ( as the Real GDP is greater than the Nominal GDP for 2018).

(b) Percentage change in GDP deflator for 2017 to 2019-

%age Change= {GDP D(2019)- GDP D(2017) / GDP D (2017)} *100

= (104.37-106.03/106.03) * 100

= -1.56%

Therefore there has been a decrease of 1.56% in the GDP deflator for 2017 to 2019.

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