2. (3.5 pts) The country described in the table below produces and consumes only
ID: 1156766 • Letter: 2
Question
2. (3.5 pts) 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 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 $3 Quantity 150 1,200 (1 pt) 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 (0.5 pt) 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 vears (1 pt) 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 vear. Estimate the inflation rate between the two vears (0.5 pt) Explain why the inflation you obtained in part b is different from the one vou obtained in part c. (0.5 pt) 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 a. b. c. d. e.Explanation / Answer
2.
A.
Nominal GDP in 2016 = 150*22 + 600*1.5 + 1200*2.25 = $6900
Real GDP in 2016 = 150*20 + 600*2 + 1200*3 = $7800
Nominal GDP in 2017 = 170*20 + 600*2 + 1100*3 = $7900
Real GDP in 2017 = 170*20 + 600*2 + 1100*3 = $7900 ( since 2017 is a base year)
Rate of growth in real GDP = (7900-7800)/7800 = 1.28%
B.
GDP deflator in 2016 = (Nominal GDP/real GDP)*100 = (6900/7800)*100 = 88.46
GDP deflator in 2017 = (Nominal GDP/real GDP)*100 = (7900/7900)*100 = 100
Inflation rate = (100-88.46)/88.46 = 13.05%
C.
Value of basket in 2016 = 10*22 + 6*1.5 + 40*2.25 = $319
Value of basket in 2016 = 10*20 + 6*2 + 40*3 = 332
CPI for 2016 = (319/332)*100 = 96.08
CPI for 2017 = (332/332)*100 = 100
Inflation rate = (100-96.08)/96.08 = 4.08%
D.
Inflation based on GDP deflator, takes everything produced in the economy, but CPI is based upon the selected basket of goods. So, the inflation rate based upon the GDP deflator, differs from the inflation rate based upon the CPI.
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