Question 1 Suppose that an economy consists of only two type

Question 1 Suppose that an economy consists of only two types of products: bread and automobiles Sales and price data for these two products for two different years are as follows YEAR No. of bread Price of bread No. of Price of sold $10 $20 automobiles sold automobiles 2016 2017 500,000 400,000 200 240 $25,000 $30,000 a. (2 points) Calculate nominal GDP in 2016 and 2017 b. (2 points) Calculate real GDP in 2016 and 2017, using 2016 as the base year c. (2 points) Calculate the GDP deflator in 2016 and 2017, using 2016 as the base year d. (2 points) Calculate the consumer price index in 2016 and 2017, using 2016 as the base year e. (2 points) Calculate the rate of inflation in 2017 by using the GDP deflator f. (2 points) Calculate the rate of inflation in 2017 by using the CPI g. (1 points) Explain why your answers in parts e and fare different.

Solution

Answer : a) The formula of nominal GDP is following :

Nominal GDP ( NGDP ) = Current year Price × Current year Quantities

Therefore,

NGDP in 2016 for bread = 500000 × 10 = 5000000

NGDP in 2016 for automobiles = 200 × 25000

= 5000000

For 2017,

NGDP for bread = 400000 × 20 = 8000000

NGDP for automobiles = 240 × 30000 = 7200000

b) By using 2016 as base year ,

Formula of Real GDP (RGDP) = Base year price × current year quantities.

For 2016 ,

RGDP for bread = 10 × 500000 = 5000000

RGDP for automobiles = 25000 × 200 = 5000000

For 2017,

RGDP for bread = 10 × 400000 = 4000000

RGDP for automobiles = 25000 × 240 = 6000000

c) Given, base year is 2016.

Formula of GDP deflator = (Nominal GDP / Real GDP) * 100

In 2016,

GDP deflator for bread = (5000000/5000000) * 100 =100

GDP deflator for automobiles = (5000000/5000000) * 100 = 100

In 2017,

GDP deflator for bread = (8000000/4000000) * 100 = 200

GDP deflator for automobiles = (7200000/6000000) * 100 = 120

d) Given, base year = 2016

Formula of Consumer Price Index ( CPI )

= (Base year quantities × Current year price / Base year quantities × Base year price ) * 100

In 2016,

CPI for bread = (500000*10 / 500000*10) × 100 = 100

CPI for automobiles = (200*25000 / 200*25000) × 100 = 100

In 2017,

CPI for bread = (500000*20 / 500000*10) × 100 = 200

CPI for automobiles = (200*30000 / 200*25000) × 100 =120.