Abby consumes only apples. In year 1, red apples cost $ 1 each, green apples cos

Question

Abby consumes only apples. In year 1, red apples cost $ 1 each, green apples cost $ 2 each, and Abby buys 10 red apples. In year 2, red apples cost $ 2, green apples cost $ 1, and Abby buys 10 green apples. Compute a consumer price index for apples for each year. Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2? Compute Abby's nominal spending on apples in each year. How does it change from I year 1 to year 2? Using year 1 as the base year, compute Abby's real spending on apples in each year. How does it change from year 1 to year 2? Defining the implicit price deflator as nominal spending divided by real spending, compute the deflator for each year. How does the deflator change from year 1 to year 2?

Explanation / Answer

a. CPI = [(2*10) + (180)]/[(1*10) + (2*0)] = 2.

This means prices have doubled from year 1 to year 2.

b. Nominal spending is the total amount spend in buying goods. In year 1 and 2, Abby buys 10 apples for $1 each, so her nominal spending remains constant at $10.

c. Real spending is the total value of output produced in each year valued at year 1 prices.

In year 1, real spending = nominal spending. In year 2, rela spending becomes: [(1*00+(2*10)] = $20.

So, real spending has doubled.

d. Implicit price deflator = Nomial spending / real spending

So, in year 1, implicit price deflator = 1 and in year 2, implicitt price deflator = $10/$20 = 0.5

Thus, it can be seen that the prices have halved in year 2.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.