Question

Federal outlays for air transportation increased from $16,743 million in 2004 to $20,923 million in 2014. The deflator for non defense federal expenditures increased from 0.8838 in 2004 (2009=1.00) to 1.0893 in 2014. Answer these questions:

a. What is the real rate of change in spending for air transportation over this period?

b. Suppose the rate of change of prices continued through 2017 at the same rate as 2004 to 2014. What outlay level in 2017 would provide the same real level as in 2014?

Answer 1

a.

Deflator is a measure of change in price level. The real value of outlay in the given question can be calculated as:

$Real \;outlay=\frac{Nominal\:outlay}{deflator}$

So, in 2004, the real outlay on air transportation is:

$Real \;outlay=\frac{16,743}{0.8838}=18,944.33$

Similarly, the real outlay in 2014 is:

$Real \;outlay=\frac{20,923}{1.0893}=19,207.75$

So, the real rate of change is

$=\frac{19,207.75-18,944.33}{18,944.33}$

or, 1.39%

b.

First, calculate the percentage change in prices from 2004 to 2014 by calculating the percentage change in deflator.

$=\frac{1.0893-0.8838}{0.8838}=0.2325$

or 23.25%

According to the question, deflator will have increased by this percentage in 2017. So, the value of deflator in 2017 can be calculated as:

$Deflator_{2017}=Deflator_{2014}*(1+0.2325)$

$Deflator_{2017}=1.0893*(1+0.2325)$

Its value comes out to be 1.342

According to the question, real outlay in 2017 should be the same as nominal 2014 level. Given this relationship, we can calculate the nominal level in 2017 as:

$Real \;outlay=\frac{Nominal\:outlay}{deflator}$

$20,923=\frac{Nominal\:outlay_{2017}}{1.342}$

or the nominal outlay in 2017 is $28,090.86 million.