Consider a hypothetical economy that produces only three goo

Consider a hypothetical economy that produces only three goods - A, B and C. Information on the quantities and prices of eaclh good for two years is given below. 2016 2017 Output Price Output Price Good A 5 S106 S11 Good B7S15 9 S13 Good C S20 14 S25

Solution

(c) NGDP in 2016 = (5 * $10) + (7 * $15) + (12 * $20) = 50 + 105 + 240 = $395

     NGDP in 2017 = (6 * $11) + (9 * $13) + (14 * $25) = 66 + 117 + 350 = $533

We assume 2016 as base year. So,

     RGDP in 2016 = (5 * $10) + (7 * $15) + (12 * $20) = 50 + 105 + 240 = $395

     RGDP in 2017 = (6 * $10) + (9 * $15) + (14 * $20) = 60 + 135 + 280 = $475

GDP Deflator in 2016 = (NGDP / RGDP) * 100 = (395 / 395) * 100 = 100

GDP Deflator in 2017 = (NGDP / RGDP) * 100 = (533 / 475) * 100 = 112.21

Let, the quantity of 2016 for calculation of CPI

Cost of market basket of goods in 2016 = (5 * $10) + (7 * $15) + (12 * $20) = 50 + 105 + 240 = $395

Cost of market basket of goods in 2016 = (5 * $11) + (7 * $13) + (12 * $25) = 55 + 91 + 300 = $446

CPI in 2016 = [(Cost of market basket of goods at current year price) / (Cost of market basket of goods at base year price)] * 100

                  = (395 / 395) * 100

                  = 100

CPI in 2017 = (446 / 395) * 100

                  = 112.91

(d) (i) Inflation in 2017 = [(112.21 - 100) / 100] * 100 = 12.21%

      (ii) Inflation in 2017 = [(112.91 - 100) / 100] * 100 = 12.91%