60 points 2 An economy produces three goods cars computers a

(60 points) 2. An economy produces three goods: cars, computers, and oranges. Quantities and prices per unit for years 2009 and 2010 are as follows: 2009 2010- Quantity 20 4 500 Price $2000 $1500 $1 Price $3000 S1000 $1 Quantity 15 Cars Computers Oranges 750

Solution

a) Find nominal GDP as the sum of current price and current quantity of all goods. Nominal GDP 2009 is given by

Price of cars x Quantity of cars + Price of computers x Quantity of computers + Price of oranges x Quantity of oranges = 20*2000 + 4*1500 + 500*1 = $46,500

Nominal GDP 2010 is given by = 15*3000 + 6*1000 + 750*1 = $51750.

Change in nominal GDP = (51750 - 46500)*100/46500 = 11.29%.

b) Real GDP in 2009 = 20*2000 + 4*1500 + 500*1 = $46,500.

Real GDP in 2010 (keeping price level fixed at 2009 level) = 15*2000 + 6*1500 + 750*1 = $39,750

Change in GDP = (39750 - 46500)*100/46500 = -14.51%

c) GDP deflator = Nominal GDP/real GDP. For 2009, GDP deflator is 100. For 2010, it is 51750/39750 = 130.19. Hence inflation rate is = (GDP deflator 2010 - GDP deflator 2009) * 100/GDP deflator 2009 = (130.19-100)*100/100 = 30.19%.