Question

Year	Quantity Goods	Quantity Services	Price Goods	Price Services
2010	2000	6200	2	1.5
2011	2200	6400	2.11	1.65
2012	2500	6750	2.15	1.65
2013	2505	7100	2.3	1.9
2014	2700	7300	2.35	2
2015	3050	8000	2.5	2
2016	3100	8450	2.65	2.1
2017	3500	8650	2.7	2.15

Assume that consumers’ typical consumption basket of goods and services is exactly represented by the (relative) quantities of goods and services produced in 2015.

a. Calculate the implied CPI in each year, based on 2015 consumption quantities.

b. Calculate the CPI inflation rate for each year and the annual average inflation rate. How do these compare to the annual and annual average inflation rate of the GDP deflator? What is the correlation between the two inflation rates? Why do the two inflation rates in this example differ, if they do? What are the sources of differences in the two inflation rates in reality

Answer 1