Year Price of Good 1 Quantity of Good 1 Price of Good 2 Quan

Year

Price of Good 1

Quantity of Good 1

Price of Good 2

Quantity of Good 2

2009

$20

50

$10

20

...

...

...

...

...

2014

$30

60

$20

30

2015

$33

70

$22

35

Consider the table above that shows prices and quantities of two goods produced in a hypothetical country. The base year is 2009. The inflation rtae (as measured by the GDP deflator) from 2014 to 2015 equals (numbers in percentages):

Inflation Rate = 7%

Inflation Rate = 8%

Inflation Rate = 9%

Inflation Rate =10%

Inflation Rate = 11%

None of the above.

Year	Price of Good 1	Quantity of Good 1	Price of Good 2	Quantity of Good 2
2009	$20	50	$10	20
...	...	...	...	...
2014	$30	60	$20	30
2015	$33	70	$22	35

Solution

Calculate nominal GDP of 2014 -

GDP = Quantity of Good 1 in 2014 * Price of Good 1 in 2014 + Quantity of Good 2 in 2014 * Price of Good 2 in 2014

        = 60 * $30 + 30 * $20

        = $2,400

The nominal GDP in 2014 is $2,400.

Calculate real GDP in 2014 -

GDP = Quantity of Good 1 in 2014 * Price of Good 1 in 2009 + Quantity of Good 2 in 2014 * Price of Good 2 in 2009

GDP = 60 * $20 + 30 *$10

        = $1,200 + $300

        = $1,500

The real GDP in 2014 is $1,500.

Calculate GDP deflator for year 2014 -

GDP deflator = (Nominal GDP in 2014/ Real GDP in 2014) * 100

                   = ($2,400/$1,500) * 100

                   = 160

The GDP deflator in year 2014 is 160.

Calculate nominal GDP of 2015 -

GDP = Quantity of Good 1 in 2015 * Price of Good 1 in 2015 + Quantity of Good 2 in 2015 * Price of Good 2 in 2015

        = 70 * $33 + 35 * $22

        = $3,080

The nominal GDP in 2015 is $3,080.

Calculate real GDP in 2015 -

GDP = Quantity of Good 1 in 2015 * Price of Good 1 in 2009 + Quantity of Good 2 in 2015 * Price of Good 2 in 2009

GDP = 70 * $20 + 35 *$10

        = $1,400 + $350

        = $1,750

The real GDP of 2015 is $1,750.

Calculate GDP deflator for year 2015 -

GDP deflator = (Nominal GDP in 2015/ Real GDP in 2015) * 100

                   = ($3,080/$1,750) * 100

                   = 176

The GDP deflator in year 2015 is 176.

Calculate inflation rate (as measured by the GDP deflator) from 2014 to 2015 -

Inflation rate = [(GDP deflator in 2015 - GDP deflator in 2014)/GDP deflator in 2014] *100

                  = [(176 - 160)/160] * 100

                  = (16/160) * 100

                  = 10%

The inflation rate (as measured by the GDP deflator) from 2014 to 2015 is 10%.

Hence, the correct answer is option (4).