Question

Problem 7: Table: Remember to show all work and briefly discuss your results. Switzerland produces only chocolates and watches. Below is a table with recent information on Switzerland production and prices. The base year is 2009, Prices and Quantities Price of A Box of Boxes of Year Price of Watches Watches Price of the Quantity of Chocolates Chocolates 2008 $50 2009 90 2010 100 $60 2011 S6S 100 a. What was nominal GDP real GDP and the GDP deflator for 2008

Answer 1

7.

A

For year 2008:

Nominal GDP = 4*100 + 50*10

Nominal GDP = $900

Real GDP = 5*100 + 50*10

Real GDP = $1000

GDP deflator = (nominal GDP / real GDP)*100 = (900/1000)*100

GDP deflator = 90

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D.

For year 2011:

Nominal GDP = 6*80 + 65*12

Nominal GDP = $1260

Real GDP = 5*80 + 50*12

Real GDP = $1000

GDP deflator = (nominal GDP / real GDP)*100 = (1260/1000)*100

GDP deflator = 126

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E.

GDP deflator for 2009 = 100 ( since 2009 is a base year)

GDP deflator for 2010 = (nominal GDP / real GDP)*100 = ((5*100 + 60*15)/(5*100 + 50*15))*100

GDP deflator for 2010 = 112

So,

Inflation rate between 2009 and 2010 = (GDP deflator in 2010 - GDP deflator in 2009)/ GDP deflator in 2009

Inflation rate between 2009 and 2010 = (112-100)/100

Inflation rate between 2009 and 2010 = 12%

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Inflation rate between 2010 and 2011 = (GDP deflator in 2011 - GDP deflator in 2010)/ GDP deflator in 2010

Inflation rate between 2010 and 2011 = (126 - 112)/112 ( GDP deflator for 2011 is already calculated in part D)

Inflation rate between 2010 and 2011 = 12.5%

The work of calculating Nominal GDP, real GDP and GDP deflator of different years, shows that GDP deflator is increasing every year and in 2008 it was less than 100. It makes inflation rate to increase every year even if it is slightly higher in 2011 that is 12.5% in comparison to 12% in year 2010 as calculated above.