Answer to Question #183907 in Macroeconomics for abdul rafay

Question

The residents of an agrarian country spend all their income on cauliflower, cucumbers, and carrots. In 2017, they produced 20 heads of cauliflower valued at Rs.200, 5 kgs of cucumbers for Rs.75, and 50 carrots for Rs.80. In 2018, they produced 25 heads of cauliflower for Rs.250, 8 kgs of cucumbers valued at Rs.160, and 50 carrots valued at Rs.150. a. Calculate nominal and real GDPs taking 2018 as the base year. Then calculate GDP-deflator index. b. Assuming that a common person consumes 1 heads of cauliflower, two kg. of cucumbers and 5 carrots, calculate CPI taking 2018 as the base year. c. Calculate inflation rate between 2017-18 measured both from GDP-deflator index and CPI?

Answer 1

a. Nominal and real GDPs taking 2018 as the base year are:

NGDP(2017) = 200×20 + 75×5 + 80×50 = 8,375,

RGDP(2017) = 250×20 + 160×5 + 150×50 = 13,300,

NGDP(2018) = 250×25 + 160×8 + 150×50 = 15,030,

RGDP(2018) = 15,030.

GDP-deflator index = 8,375/13,300 = 0.63.

b. CPI(2017) = (200×1 + 75×2+ 80×5)/(250×1 + 160×2 + 150×5)×100 = 750/1320×100 = 56.8.

c. Inflation rate between 2017-18 measured from GDP-deflator index is:

0.63 - 1 = -0.37 or -37%,

and from CPI is:

56.8 - 100 = -43.2%.