Question

-Date Name 4) 2006 $4.00 100 $2.00 180 2007 $5.00 120 $2.50 200 2008 $6.00 150 $3.50 200 (a) Compute the growth rate of real GDP of Year 2007 Compute the inflation rate of Year 2008, using GDP deflator as a measure of general price (b) level. (c) Suppose that the CPl is calculated using a market basket consisting of 150 Sandwiches and 200 magazines. Compute the inflation rate of Year 20017 using CPl as a measure of general price level. 5 lf there is shortage of loanable funds, then

Answer 1

4.

A.

year 2006 is taken as the base year.

Real GDP in 2006 = 4*100 + 2*180 = $760

Real GDP in 2007 = 4*120 + 2*200 = $880

Real GDP growth rate in 2007 = (880-760)/760

Real GDP growth rate in 2007 = 15.79%

B.

GDP deflator in 2007 = (nominal GDP in 2007/real GDP in 2007)*100

GDP deflator in 2007 = ((5*120 + 2.5*200)/(4*120 + 2*200))*100 = 125

GDP deflator in 2008 = ((6*150 + 3.5*200)/(4*150 + 2*200))*100 = 160

So,

Inflation rate in 2008 = (160-125)/125 = 28%

C.

CPI in 2006 = 100 , because it is a base year

CPI in 2007 = (basket value in 2007/basket value in base year)*100

CPI in 2007 = (5*150+2.5*200)/(4*150+2*200)*100 = 125

Inflation rate in 2007 = (125-100)/100

Inflation rate in 2007 = 25%