Project 1 Week 2 Inflation Project Price Index and Inflation YEAR Units of outpu

Question

Project 1 Week 2

Inflation Project

Price Index and Inflation

YEAR Units of output price per unit

1 3 3

2 4 4

3 6 5

4 7 7

5 8 8

1. Refer to the above data. If year 3 is chosen as the base year, what is the price index for year 1

2. Refer to the above data. What is the nominal GDP for year 4?

3. Refer to the above data. What is real GDP for year 5?

4. Refer to the above data. In determining real GDP, which year(s) must the nominal GDP be inflated and which year(s) must the nominal GDP be deflated?

Hints

1. If year 3 is chosen as the base year, what is the price index for year 1?

Real GDP for year 1 = 3*5= 15 $

Nominal GDP for year 1 = 3*3= 9 $

GDP deflator (the price index) = Nominal GDP/Real GDP*100 = 9/15*100 = (you can calculate the result)

Explanation / Answer

(1) Price index = 100 x 3/5 = 60 (2) nominal GDP doe year 4 = 7 x 7 = 49$ (3) Real GDP for year 5 = 8 x 5 = 40$ (4) Year 1 and Year 2 must be deflated while Year 4 and year 5 must be inflated.

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