Question 5 (Total 10 pts., 5 pts. each) A small nation of ten people idolizes th
ID: 1215545 • Letter: Q
Question
Question 5 (Total 10 pts., 5 pts. each) A small nation of ten people idolizes the TV show American Idol. All they produce and consume are karaoke machines and CDs, in the following amounts:
<Karaoke Machine> CDs
Price
Quantity
Price
Quantity
2013
$50
100
$10
70
2014
$70
120
$12
90
Using a method of the CPI, compute the percentage change in the overall price level (= inflation rate). Use 2013 as the base year, and fix the amount the basket at 2 karaoke machines and 3 CDs.
Using a method of the GDP deflator, compute the percentage change of the overall price level (= inflation rate) Also use 2013 as the base year.
Price
Quantity
Price
Quantity
2013
$50
100
$10
70
2014
$70
120
$12
90
Explanation / Answer
ans
Using a method of the CPI, compute the percentage change in the overall price level (= inflation rate). Use 2013 as the base year, and fix the amount the basket at 2 karaoke machines and 3 CDs.
CPI uses consumer basket in order to estimate change in price level
cost of consumer basket in 2014= 2*50 + 3*10 = 130
cost of consumer basket in 2013= 2*70 +3*12 = 176
CPI= (cost of consumer basket in 2014/cost of consumer basket in 2013)*100 = (176/130)*100= 135.4
Using a method of the GDP deflator, compute the percentage change of the overall price level (= inflation rate) Also use 2013 as the base year.
for 2014
nominal GDP= value of GDP of 2014 at current prices = 70*120 + 12*90 = 9480
real GDP =value of GDP of 2014 at base year(2013) prices= 50*120 + 10*90 = 6900
GDP deflator = (nominal GDP/ real GDP)*100 = (9480/6900)*100= 137.4
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