1. The people on Coral Island only buy juice and cloth. The CPI basket contains

Question

1. The people on Coral Island only buy juice and cloth. The CPI basket contains the quantities bought in 2010.

The average household spent $34 on juice and $36 on cloth in 2010 when the price of juice was $2 a bottle and the price of cloth was $4 a yard.

In the current year, 2011, juice is $5 a bottle and cloth is $3 a yard.

Calculate the CPI and the inflation rate in 2011.

2. The tables show the quantities of the goods that Harry bought and the prices he paid during two consecutive weeks.

Harry's CPI market basket contains the goods he bought in Week 1.

Calculate Harry's CPI in Week 2.
and
What was his inflation rate in Week 2?

3. The base year is 2005. Real GDP in 2005 was $10 trillion (2005 dollars). The GDP deflator in 2008 was 112, and real GDP in 2009 was $11 trillion (2005 dollars).

Calculate nominal GDP in 2005 and in 2009. What is the percentage increase in nominal GDP between 2005 and 2009?

Explanation / Answer

1) The CPI basket is 17 bottles of juice and 9 yards of cloth. The total amount spent on the CPI basket in 2010 was $70 . The CPI in 2011 = 17*$5 + 9*$3 = 85 + 27 = $112.

Inflation = 112-70/70 = 42/70 = 60%.

2) CPI week 1 = 5*$3 + 5*$1 + 10*$2 = $40.

CPI week 2 = 4*$3.25 + 10*$1 + 10*$3 = $$53.

Inflation = 53-40/40 = 13/40 = 32.5%

3) In the base year, nominal GDP equals real GDP. So in the base year of 2005, nominal GDP = $10 trillion. In general, nominal GDP = real GDP * price level * 100. So in 2009, nominal GDP = $11 trillion * 112 * 100, which is $12.32 trillion. The percentage increase in nominal GDP is equal to [($12.32 trillion - $10 trillion) / $10 trillion] *100, which is 23.2 percent.

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