Question

The economy of Tuland produces only two products fish and calculators. The following information is available for production and prices of Tuland's products for the years 2009 and 2010. Quantity of fish Quantity of calculators Price of fish Price of calculators 2009 120 100 $10.00 $20.00 2010 144 130 $11.50 $22.00 Using the above information, calculate the following values. (Enter your responses rounded to two decimal places.) GDP for 2009 in 2009's prices GDP for 2009 in 2010's prices GDP for 2010 in 2009's prices GDP for 2010 in 2010's prices Using 2009 as the base year, compute the percentage change in the price level, i.e. the inflation rate. hint: you need to compute the GDP deflator first. Using 2010 as the base year, compute the percentage change in the price level, i.e. the inflation rate. hint: you need to compute the GDP deflator first. The geometric average of the two inflation rates

Answer 1

Solution:-

(a) Calculate GDP for 2009 in 2009's Prices:-

GDP for 2009 in 2009's Prices = quantity of fish in 2009 * price of fish in 2009 + quantity of calculators in 2009 * price of calculators in 2009

= (120 * 10) + (100 * 20)

= 1200 + 2000

= 3200

(b) Calculate GDP for 2009 in 2010's Prices:-

GDP for 2009 in 2010's Prices = quantity of fish in 2009 * price of fish in 2010 + quantity of calculators in 2009 * price of calculators in 2010

= (120 * 11.50) + (100 * 22)

= 1380 + 2200

= 3580

(c) Calculate GDP for 2010 in 2009's Prices:-

GDP for 2010 in 2009's Prices = quantity of fish in 2010 * price of fish in 2009 + quantity of calculators in 2010 * price of calculators in 2009

= (144 * 10) + (130 * 20)

= 1440 + 2600

= 4040

(d) Calculate GDP for 2010 in 2010's Prices:-

GDP for 2010 in 2010's Prices = quantity of fish in 2010 * price of fish in 2010 + quantity of calculators in 2010 * price of calculators in 2010

= (144 * 11.50) + (130 * 22)

= 1656 + 2860

= 4516

(d) GDP deflator = Nominal GDP / Real GDP x 100

GDP deflator in 2009 = GDP for 2009 in 2009's prices / GDP for 2009 in 2009's prices x 100

                                   = 3200 / 3200 x 100

                                   = 100

GDP deflator in 2010 = GDP for 2010 in 2010's prices / GDP for 2010 in 2009's prices x 100

                                   = 4516 / 4040 x 100

                                   = 111.78

Inflation Rate = (GDP deflator in 2010 - GDP deflator in 2009)/GDP deflator in 2009 x 100

                      = (111.78 - 100) / 100 x 100

                      = 11.78%

6) GDP deflator in 2009 = GDP for 2009 in 2009's prices/GDP for 2009 in 2010's prices x 100

                                      = 3200 / 3580 x 100

                                      = 89.38

GDP deflator in 2010 = GDP for 2010 in 2010's prices/GDP for 2010 in 2010's prices x 100

                                 = 4516 / 4516 x 100

                                  = 100

Inflation Rate = (GDP deflator in 2010 - GDP deflator in 2009)/GDP deflator in 2009 x 100

                      = (100 – 89.38) / 89.38 x 100 = 11.88%

Arithmetic average of growth rates = (11.78 + 11.88) / 2 = 11.83