Edit: from question 2 Base year is 2015. So in 2015, nominal GDP equals Real GDP

Question

Edit: from question 2

Base year is 2015. So in 2015, nominal GDP equals Real GDP.

Nominal GDP in 2015=Real GDP in 2015=Price of apples in 2015*quantity of apples in 2015+Price of books in 2015*quantity of books in 2015=10*5000+10*4000=$90000

Nominal GDP in 2016=Price of apples in 2016*quantity of apples in 2016+Price of books in 2016*quantity of books in 2016=11*6000+13*4000=$118000

Real GDP in 2016=Price of apples in 2015*quantity of apples in 2016+Price of books in 2015*quantity of books in 2016=10*6000+10*4000=$100000

GDP deflator=Nominal GDP/Real GDP

Thus GDP deflator in 2015=90000/90000=1

GDP deflator in 2016=118000/100000=1.18

If the market basket of the Panther Economy is 10 bushels of apples, 10 books, and 10 bushels of oranges (produced in Brazil). The prices for apples and books are the same as in question 2 above (apples are $10 in 2015 and $11 in 2016; and books are $10 in 2015 and $13 in 2016) and the price of a bushel of oranges is $10 in 2015 and $12 in 2016.   

What is the CPI in 2015? ________________________       

What is the CPI in 2016?  ­­­_______________________        

Would you expect any change in the purchases of apples and oranges by households from 2015 to 2016?  Yesor No(circle) Why?     

Based on what the consumer actually purchases in 2016, would the CPI in 2016 be higheror lower than your answer in b? (circle)  Why?

Explanation / Answer

CPI in 2015 => since 2015 is the base year, CPI will be taken as 100 for 2015 so as to compare whether average prices have increased or decreased over the years.

CPI in 2016 = (current period price of the basket/ base period price of the basket)* 100 = 11+13+12/10+10+10 * 100 = 36/30*100 = 120

Thus, CPI is higher in 2016 than 2015.

Yes, there will be change in the purchases of apples and organes by households from 2015 to 2016. Since the price of apples have increased from $10 to $11, consumers will buy less of it and similarly, price of oranges have gone up from $10 to $12, consumers will buy less of it as other things remaining constant, there is inverse relation between price and demand.

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