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3. Consider an economy that produces oranges and boomerangs. The prices and quantities of these goods in two different years are reported in the table below. Fill in the missing entries. % change 2017-18 Quantity of oranges Quantity of boomerangs Prices of oranges (dollars) Prices of boomerangs (dollars) 3 Nominal GDP Real GDP in 2017 prices 2017 100 20 2018 108 30 1.10 3.15 Real GDP in 2018 prices 4. a. Using the data in Question 3, calculate the rate of inflation from 2017-2018 based on the GDP deflator with base year 2017. b. Calculate the rate of inflation from 2017-2018 based on the Consumer Price Index, assuming the 2017 quantities given in Question 3 are the consumer basket. c. If they are different, why?

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2017 100 20 2018 108 30 1.10 3.15 % change 201 7 2018 Quantity of oranges Quantity of boomeran Price of Oranges 1 (dollars) Prices of boomeran (dollars Nominal GDP Real GDP in 2017 160 50 10 gS 213.3 198 160 ices To find the % change of increase in quantity minus the new quantity from the original quantity, then divide by the original quantity and multiply by 100 Q1-Q Qx 100 108-100 100 100-8 30-20 20 x 100-50 To find the increase in price minus the new price from the original price, then divide the increase by original price Po x 100 し10-1 100 = 10 3.15-3 100-5 Nominal GDP is the GDP at current year price (price in the year of manufacturing). It can be calculated by multiplying the current year quantity witlh current year price Nominal GDP ty. Price for 2017 Oranges boomerarn Nominal GDP 100 60 160 100 1 20Nominal GDP Qty. Price for 2018 Oranges boomerangs Nominal GDP 118.8 94.5 213.3 108 1.10 30 The Real GDP is the GDP calculated at on a base year price. The Real GDP is calculated by taking a preceding year as base year Here we are choosing 2017 as the base year. The real GDP and Nominal GDP will be the same in the base year So the Real GDP in 2017 is 160. The real GDP in 2018 is the quantity in 2018 multiplied by 2017 prices (base year price) QixPoQ is the current year quantity and Po is the base year price). Real GDP for Qty. in Price in base year 2018 Current ear Oranges boomerarn Real GDP 30 90 198 4. a. The formula for finding the GDP deflator is Nominal GDP/Real GDP x 100 The GDP deflator for the year 2017 is 160 160x 100- 100 The GDP deflator for the year 2018 is 213.3/198x100-107.8 The inflation rate during 2017-2018 is GDP deflator for the current-GDP deflator of the base year GDP deflator of the base year x (107.8-100/100x100-7.8) Inflation rate as per GDP deflator is 7.8 100 _x100 P, and Q are the price and quantity in current year and Po and Qo are price in the base year and quantity in the base year i.e Total expenditure on the basket of goods in the current year divided by the total expenditure on the basket in the base year multiplied by 100Total expenditure on the basket in 2017 is 2017 Orange boomeran Total Ex Price tv 100 20 100 60 160 gs Total expenditure on the basket in 2018 is 2017 Orange boomeran Total Ex tv 100 20 Price 1.10 3.15 110 173 CPI for 2018 is 173/160x 100-108.125 To find the inflation rate minus the previous year CPI from the current year and divide it with previous year CPI and multiply with 100 The CPI for the base year(2017) is taken as 100 Inflation rate for 2018 is 108.125-100 100x 100- 8.125 Rate of inflation as per CPI deflator -8.125 The inflation rate as per GDP deflator and CPI differs because CPI assign fixed weights to prices but the GDP detlator assign changing weights.

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