Homework SourseSuppose an extremely simple economy produces only two goods
Suppose an extremely simple economy produces only two goods, pillows and rugs. In
the first year, 50 pillows are produced, and sold at $5 each; 11 rugs are produced, and
sold at $50 each. In the second year, 56 pillows are produced, and sold for $6 each; 12
rugs are produced, and sold at $60 each.
a. Calculate a constant weight price index for the second year, using the first year
as the base.
b. What is the growth rate of prices (inflation rate) from the first to the second
year?
Suppose an extremely simple economy produces only two goods, pillows and rugs. In
the first year, 50 pillows are produced, and sold at $5 each; 11 rugs are produced, and
sold at $50 each. In the second year, 56 pillows are produced, and sold for $6 each; 12
rugs are produced, and sold at $60 each.
a. Calculate a constant weight price index for the second year, using the first year
as the base.
b. What is the growth rate of prices (inflation rate) from the first to the second
year?
Suppose an extremely simple economy produces only two goods, pillows and rugs. In
the first year, 50 pillows are produced, and sold at $5 each; 11 rugs are produced, and
sold at $50 each. In the second year, 56 pillows are produced, and sold for $6 each; 12
rugs are produced, and sold at $60 each.
a. Calculate a constant weight price index for the second year, using the first year
as the base.
b. What is the growth rate of prices (inflation rate) from the first to the second
year?
a. Calculate a constant weight price index for the second year, using the first year
as the base.
b. What is the growth rate of prices (inflation rate) from the first to the second
year?
Solution
a.
Year-1
Year-2
Item
Q
Prices
Q
Prices
Pillows
50
5
56
6
Rugs
11
50
12
60
The market basket for Year 1 = 50*5+11*50 = 800
The market basket for Year 2 = 56*6+12*60 = 1056
Price index for Year 2 = (Market basket for year 2/market basket for year 1)*100
= (1056/800)*100
= 132
b. Growth rate of prices = (price index for year 2- price index for year 1)/price index for year 1
= (132-100)/100 = 32 percent
| Year-1 | Year-2 | |||
| Item | Q | Prices | Q | Prices |
| Pillows | 50 | 5 | 56 | 6 |
| Rugs | 11 | 50 | 12 | 60 |
