The country described in the table below produces and consumes only three goods:

Question

The country described in the table below produces and consumes only three goods: energy drinks, pizza, and t-shirts. The quantity produced and price of each good in 2016 and 2017 are provided below.

a. Refer to the above table. Assuming that 2017 is the base year, compute the nominal and real GDPs for 2016 and 2017. Estimate the rate of growth of the real GDP between the two years.

b. Refer to the above table. Assuming that 2017 is the base year, compute the GDP deflator in 2016 and 2017. Estimate the inflation rate between the two years.

c. Assume the average consumer buys 10 t-shits, 6 cans of energy drinks, and 40 slices of pizza per year. Compute the consumer price index for 2016 and 2017, taking 2017 as the base year. Estimate the inflation rate between the two years.

d. Explain why the inflation you obtained in part b is different from the one you obtained in part c.

e. Alex's salary in 2017 was $50,000 and was increased that year to compensate for changes in the average consumer cost of living between 2016 and 2017. Compute Alex's original salary in 2016.

2016 2017 Good t-shirts Energy drinks(cans) 600 Pizza (slices) Price $22 $1.50 $2.25 Quantity 170 600 1,100 Price $20 $2 S3 Quantity 150 1,200

Explanation / Answer

(A) Nominal GDP-2016

(150*22)+(600*1.5)+(1200*2.25)= $6900

Nominal GDP-2017

(170*20)+(600*2)+(1100*3)= $ 7900

Real GDP

Note- for Base year, Real GDP is always equal to Nominal GDP. In this case-2017 is Base Year hence nominal GDP of 2017 will be

Real GDP- 2017

(170*20)+(600*2)+(1100*3)= $ 7900

Real GDP 2016= RGDP16= Q16* P17

(150*20) T-shirt

+(600*2) Energy Drink

+(1200*3) Pizaa

= $7800

Rate of growth of the real GDP between the two years-

% CHange= RGDP16 - RGDP17/RGDP17

{7800-7900/7900}*100= 1.26%

Real GDP decline by 1.26% between 2016 and 2017.

(B) GDP Deflator2016 = (NGDP16/RGDP16)*100

(6900/7800)*100= 88.46%

GDP Deflator2017 = (NGDP17/RGDP17)*100

(7900/7900)*100= 100

GDP Deflator is always equal to 100 in Base year. Price Index is Unitless.

Inflation rate between 2016 and 2017

GDP Def16- GDP Def17/GDP Def17

88.46-100/100*100= -11.54% THis is inflation between 2016 and 2017. Actualy inflation is at negative side.

  

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