1 Develop the output indices of the Nouveau Slaughtering pla

1. Develop the output indices of the Nouveau Slaughtering plant (base year 2003)

Year             Pound of cattle slaughter output index

2001               180,000                                      ______________

2002               250,000                                      ______________

2003               200,000                                     ______________

2. Suppose your normal income in 1995 was $24,000. Suppose, too, that the consumer price index for 2003 was 1.5 and that the base year for this index was 19995. How much nominal income would you need in 2003 in order to match the spending power of your $24,000 in 1995?

3. The output produced and the price of this out put ($/bushel) for a farmer over the last three years are as follows:

year output    price    consumer price index     production expenses

2001   70.000   $3.20             1.10                                   $120,000

2002    75,000    $ 2.90            1.20                                   $ 140,000

2003     80,000    $ 2.80            1.15                                   $ 135,000

Let the base year be 2002:

a. For the year 2001, what is the output index? Interpret this measure.

b. For the year 2003, what is the output index? Interpret this measure.

c. Assume that the only sources of income for this farmer is from the production of this output. What is the best year in terms of real income for this farmer?

Solution

(1) Output index = Current year output / Base year output

Output index, year 2001 = 180,000 / 200,000 = 0.9 (90%)

Output index, year 2002 = 250,000 / 200,000 = 1.25 (125%)

Output index, year 2003 = 200,000 / 200,000 = 1** (100%)

** Output index of base year is always 1 (100%).

(2) Required nominal income = Base year income x (CPI of current year / CPI of base year)

Required nominal income = $24,000 x 1.5 / 1** = $32,000

** CPI of base year is always considered as 1 (or 100%).

NOTE: First 2 questions are answered