The economy of Tuland produces only two products fish and cell phones. The follo

Question

The economy of Tuland produces only two products fish and cell phones. The following information is available for production and prices of Tuland's products for the years 2009 and 2010. Using the above information, calculate the following values. (Enter your responses rounded to two decimal places.) GDP for 2009 in 2009's prices dollar 3440.00 GDP for 2009 in 2010's prices dollar 3900.00 GDP for 2010 in 2009's prices dollar 4084.00 GDP for 2010 in 2010's prices dollar 4605.00 Using 2009 as the base year, compute the percentage change in the price level, i.e. the inflation rate. percentage Using 2010 as the base year, compute the percentage change in the price level, i.e. the inflation rate. percentage The geometric average of the two inflation rates percentage

Explanation / Answer

Taking 2009 as base year

GDP Deflator = Nominal GDP/Real GDP*100

D2009 = 3440/3440*100 = 100

D2010 = 4605/4084*100 = 112.757

Inflation rate = D2010-D2009/D2009 = (112.757-100)/100 = 0.127

b.

With 2010 as base price

GDP Deflator 2009 = D2009 = 3440/3900*100 = 88.20

GDPDeflator 2010 = D2010 = 4605/4605*100 = 100

Inflation rate = (D2010-D2009)/D2009 = (100 - 88.20)/88.20 = 0.1337

Geometric Average = (0.127*0.1337)^0.5 = 0.12997

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