1. 3 points] Consider an economy that produces and consumes bread and automobile
ID: 1150052 • Letter: 1
Question
1. 3 points] Consider an economy that produces and consumes bread and automobiles. In the following table are data for two different years. Year ear 2015 GoodQuantity Price Quantity Price Automobiles100 $50,000 120 $60,000 Bread 500,000 10 400,000 $20 a. Calculate Nominal GDP in Year 2015 and 2016, and the nominal GDP growth rate. Calculate Real GDP in Year 2015 and 2016, with the base year of 2016, and the real GDP growth rate b. Suppose a consumer's basket consists of 100 Automobiles and 400,000 breads. Compute the Consumer Price Index (CPI) in 2015 with 2016 as the base year. Compute the GDP deflator c. What are the reasons why CPI might overstate inflation?Explanation / Answer
Answer)
a) Nominal GDP 2015 = ( Price automobiles * Q automobile ) + ( Price bread * Qbread )
= ( $ 50000* 100 ) + ( $ 10 * 500000 )
= 5000000 + 5000000
= $ 10000000
Nominal GDP 2016 = ( Price automobile * Qautomobile ) + ( Price bread * Qbread )
= ( $ 60000 * 120 ) + ( $ 20 * 400000 )
= 7200000 + 8000000
= $ 15200000
Real GDP 2016 = ( Price automobile 2015 * Qautomobile 2016 ) + ( Price bread 2015 * Qbread 2016 )
= ( $ 50000 * 120 ) + ( $ 10 * 400000 )
= 6000000 + 4000000
= $ 10000000
Real GDP 2015 = ( Price automobile 2015 * Q automobile 2015 ) + ( Price bread 2015 * Q bread 2015 )
= ( $ 50000 * 100 ) + ( $10 * 500000 )
= 5000000 + 5000000
= $ 10000000
b) GDP deflator = Nominal GDP 2016 / Real GDP 2016
= $ 15200000 / $10000000
= 1.52
CPI 2016 = ( P aut 2016 * Q autom 2015 ) + ( Pbrd 2016 *Q bred 2015 ) / ( P aut 2015* Q aut 2015 ) + (P brd2015 *Qbrd2015)
= ( $ 60000 * 100 ) + ($20 * 500000) / ( $ 50000 * 100 ) + ( $10 * 500000 )
= 6000000 + 10000000 / 5000000 + 5000000
= 16000000 / 10000000
= 1.6
c) The prices of capital goods are included in GDP deflator but not in CPI as CPI is consumer price index which includes only consumer goods.
The prices of imported goods are included in CPI but not in GDP deflator.
The basket of goods is fixed in CPI as it is Laspeyre Index whereas the basket of goods changes every year in GDP deflator as it is Paasche's index.
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