Assume that an economy produces only three goods; Computers, cars, and pizza. Table 1 gives the price and quantity for each good and the number of employed and unemployed individuals for the years 2010-2013. Table 2 gives the fixed basket used for calcula
Assume that an economy produces only three goods; Computers, cars, and pizza. Table 1 gives the price and quantity for each good and the number of employed and unemployed individuals for the years 2010-2013. Table 2 gives the fixed basket used for calculating the CPI. Assume that the base year is 2011 and show your work! Table 1 - Price and Quantity of Goods Sold in 2010-2013 2010 2011 2012 2013 P Q P O P Q 25 Computers Cars Pizza $400/unit $18,000/unit $10/unit 20 $500/unit 10 $20,000/unit 500 $10/unit Q P 15 $450/unit 12 $22,000/unit 600 $12/unit 20 $350/unit 10 $28,000/unit 550 $15/unit 12 500 Table 2-Fixed Basket for CPI Computers Cars Pizza 2.2 1.3 54 A) Compute nominal GDP for each year (assume that this is all final consumption and there are no intermediate goods). B) Compute real GDP for each year using 2011 as the base year. C) Compute the GDP deflator for each year. D) What was the inflation rate in 2011, 2012, and 2013 using the GDP deflator? E) Compute the CPI Index for each year using 2011 as the base year (Note: The basket is given in Table 2 and the prices are from Table 1). F) What was the inflation rate in 2011, 2012, and 2013 using the CPI?
Homework Answers
a) Nominal GDP in 2010 = P of computers in 2010 * Q of computers in 2010 + P of cars in 2010 * Q of cars in 2010 + P of pizza in 2010 * Q of pizza in 2010 = $400 * 20 + $18,000 * 10 + $10 * 500 = $193,000
Nominal GDP in 2011 = P of computers in 2011 * Q of computers in 2011 + P of cars in 2011 * Q of cars in 2011 + P of pizza in 2011 * Q of pizza in 2011 = $500 * 15 + $20,000 * 12 + $10 * 600 = $253,500
Nominal GDP in 2012 = P of computers in 2012 * Q of computers in 2012 + P of cars in 2012 * Q of cars in 2012 + P of pizza in 2012 * Q of pizza in 2012 = $450 * 20 + $22,000 * 10 + $12 * 550 = $235,600
Nominal GDP in 2013 = P of computers in 2013 * Q of computers in 2013 + P of cars in 2013 * Q of cars in 2013 + P of pizza in 2013 * Q of pizza in 2013 = $350 * 25 + $28,000 * 12 + $15 * 500 = $352,250
b) Real GDP in 2010 = Nominal GDP in 2010 = P of computers in 2010 * Q of computers in 2010 + P of cars in 2010 * Q of cars in 2010 + P of pizza in 2010 * Q of pizza in 2010 = $400 * 20 + $18,000 * 10 + $10 * 500 = $193,000
Real GDP in 2011 = P of computers in 2010 * Q of computers in 2011 + P of cars in 2010 * Q of cars in 2011 + P of pizza in 2010 * Q of pizza in 2011 = $400 * 15 + $18,000 * 12 + $10 * 600 = $228,000
Real GDP in 2012 = P of computers in 2010 * Q of computers in 2012 + P of cars in 2010 * Q of cars in 2012 + P of pizza in 2010 * Q of pizza in 2012 = $400 * 20 + $18,000 * 10 + $10 * 550 = $193,500
Real GDP in 2013 = P of computers in 2010 * Q of computers in 2013 + P of cars in 2010 * Q of cars in 2013 + P of pizza in 2010 * Q of pizza in 2013 = $4000 * 25 + $18,000 * 12 + $10 * 500 = $321,000
c) GDP deflator in 2010 = 1
GDP deflator in 2011 = (Nominal GDP in 2011 / Real GDP in 2011) * 100 = (253,500 / 228,000) * 100 = 1.11
GDP deflator in 2012 = (Nominal GDP in 2012 / Real GDP in 2012) * 100 = (235,600 / 193,500) * 100 = 1.22
GDP deflator in 2013 = (Nominal GDP in 2013 / Real GDP in 2013) * 100 = (352,250 / 321,000) * 100 = 1.10
d) Inflation rate in 2011 = [(1.11 - 1) / 1] * 100 = 11%
Inflation rate in 2012 = [(1.22 - 1.11) / 1.11] * 100 = 9.50%
Inflation rate in 2013 = [(1.10 - 1.22) / 1.22] * 100 = -9.87%
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