Question

1. Suppose there are only 3 different goods produced and consumed in a closed economy. The following table shows the prices and quantities of each good consumed in 2002, 2003, 2004, and 2005. Price of a Quantity of Price Price of Quantity pair of a pair of of Quantity Year Apple of Apple shoes Breed of Breed 3001000 1500 shoes 2002 2003 500 600 15 100 1200 2004 80020 3501300 2005 900 25 500 Calculate nominal GDP in each of the four years. Calculate Real GDP in each of the four years, using 2002 as the base year. Calculate the GDP deflator for each of the four years. Utilizing GDP deflator, calculate inflation for 2004 and 2005. Calculate Real GDP for 2004 and 2005 using the chain-weighted method (assuming 2002 as the base year) Calculate the GDP deflator and inflation using Real GDP from part e. Are your answers to part d and part f the same? Why or why not? Using the quantities from 2002 for your market basket, and 2002 as your base year, calculate the CPI for 2002, 2003 and 2004. Using the CPI calculate inflation for 2003, 2004 and 2005 Recalculate CPI and inflation using the 2002 quantities for your market basket but with 2005 as your base year. a. b. c. d. e. f. g. h. i. j. k. Now calculate CPI and inflation using 2005 quantities as your market basket and 2002 as l. Does which year you choose as a base year matter? How about your choice of quantities m. Compare your answers from part d with your answers from part i. If they are the same, your base year for the market basket? why are they the same? If they are different, why are they different?

Answer 1

c) GDP deflator = Nominal GDP/Real GDP times 100 GDP deflator (2002) = 100 GDP deflator (2003) = 12,000/8,700 times 100 = 137.93 GDP deflator (2004) = 15,500/10,550 times 100 = 146.92 GDP deflator (2005) = 23000/13,500 times 100 = 170.37 d) Inflation = (170.37 - 146.92/146.92) times 100% = 15.96%