Homework SourseUse the table to answer the following questions Show your wo
Use the table to answer the following questions *Show your work
**2012 is the base year
A. What is the NGDP for 2011 and 2012?
B. What is the RGDP for 2011 and 2012?
C. To determine actual growth in production from 2011 to 2012, should you use NGDP or RGDP? Explain why, you should use the one you chose.
D. If water and Dr.’s visits make up the consumption basket, what is the CPI for 2011 and 2012?
E. What is the purpose of using the base year when calculating CPI? Explain
201i 2012 Price QuantityPrice Quantity Apples 0.50 Water 25 00 30 3.00 20 3.50 16.00 Dr.\'s Visits 15.00 2Solution
Let apples is denoted by X1, water by X2 and Dr. Visits by X3
A).
NGDP for 2011 is given by:
NGDP = X1P1 * X2 P2* X3P3
NGDP2011 = 0.50*25 + 3 * 20 + 15*1
= 12.5 + 60 + 15
NGDP2011 =87.5
NGDP2012 = 1*30 + 3.50*22 + 16*2
= 30 + 77 + 32 = 139
NGDP2012 =139
B).RGDP is calculated at a constant price. It is given in the question that 2012 is the base year. Therefore,
For real GDP calculation prices taken for year 2011 will be of year 2012.
RGDP for 2011 is given by:
RGDP = X1P1 * X2 P2* X3P3
RGDP2011 = 0.50*30 + 3 * 22 + 15*2
= 15 + 66 + 30
RGDP2011 =111
For RGDP calculation, Prices will be taken for 2012 year will be 2012 year prices only.
RGDP2012 = 1*30 + 3.50*22 + 16*2
= 30 + 77 + 32 = 139
RGDP2011 =139
C).
To determine actual growth in production from 2011 to 2012, RGDP should be considered because it keeps price constant, therefore you know that the change in economic growth is purely due to change in output.
D). If water and Consumption makes the consumption basket then, Lets fix consumption at 2011 level.
3*20 + 15*1 = 60 * 15 = 75 , Price of basket in 2011
3.50 * 20 + 16 *1 = 70 +16=86, Price of basket in 2012
CPI = Price of basket in current year/ Price of basket in base year
For CPI 2011,
CPI = 75/86=0.87
CPI for 2012,
CPI = 86/86 = 1
E). CPI is used to measure inflation, how much price has changed. Therefore quantitiy is kept constant.
