Question

Suppose the table below shows the prices and quantities of the output produced by an economy in two years. If Year 1 is the base year, then what is the inflation rate in the GDP deflator?

Answer 1

$$Solution$$

To calculate the inflation rate in the GDP Deflator, lets consider the table below,

Taking 2000 as the base year, then this can be obtained as below

$Nominal\ GDP\ 2000 = {( P_{cars}2000 \times Q_{cars}2000 )} +{ ( P_{bread} 2000 \times Q_{bread} 2000 )} =11,500\\$

$Nominal\ GDP\ 2010 = { P_{cars}\ 2010 \times\ Q_{cars}2010 } + { P_{bread}\ 2010\times Q_{bread}\ 2010}=16,000,000$

$Real\ GDP\ 2010 ={ ( P_{cars}2000 * Q_{cars}2010 )} +{ ( P_{bread}\ 2000\times\ Q_{bread}\ 2010)}=10,800,000\\$

$Therefore,\ Price\ Deflator\ 2010 = (\frac{Nominal\ GDP\ 2010}{Real\ GDP\ 2010 })\times\ 100= 148\%$ , which is the inflation rate.