Question

Suppose the following economy produced pencils and erasers in 2011 and 2012 according to the following table. CPl basket in this economy consists of 5 pencils and 7 erasers. Which one is the value nearest to an inflation rate by GDP deflator between 2010 and 2011 using 2011 as a base year? 2010 P20102011 P2011 Pencils 5 10 8 30 Erasers7 20 15 40

Answer 1

Gdp deflator=(nominal GDP/real GDP)*100. CPI=(cost of the basket in the current year/cost of the basket in base year)*100

Gdp deflator = (nominal GDP/real GDP) * 100. CPI = (cost of the basket in the current year/cost of the basket in base year) * 100 \r\n 1) Nominal GDP in 2010 doublerightarrow (5 times 10) + (7 times 20) = $ 190 Nominal GDP in 2011 doublerightarrow (8 times 30) + (15 times 40) = $ 840 Real GDP in 2010 base year 2011 doublerightarrow (5 times 30) + (7 times 40) = $ 430 Real GDP in 2011 base year 2011 doublerightarrow (8 times 30) + (15 times 40) = $ 840 GDP deflator in 2011 doublerightarrow = 100 on 2011 is base year therefore Inflation rate = 100 - 44.186/44.186 times 100 almostequalto 126% \r\n 2) cost of basket in 2010 doublerightarrow (5 times 10) + (7 times 20) = $ 190 cost of basket in 2011 doublerightarrow (8 times 30) + (15 times 40) = $ 840 therefore CPI in 2010 (base year 2010) = 190/190 times 100 = 100