Answer to Question #263133 in Macroeconomics for fahmida

Question

1.Based on the following statistic, form a price index (consider 2015 as the base year) for the country East Germany: Products

Computer Price & Quantity in 2015- $400,10 

Computer Price & Quantity in2016- $300,10

Mobile Price & Quantity in 2015- $2,14 

Mobile Price & Quantity in 2016- $10,14

Wheat Price & Quantity in 2015- $8,18 

Wheat Price & Quantity in2016- $9,18

a) After forming a price index, calculate and comment on inflation of East Germany.

2.Explain with a diagram how a decrease in human capital can lead to detrimental results for economic  growth (holding physical capital and technological progress constant)?

Answer 1

a. The GDP deflator is a price index that measures the price changes over time. The GDP deflator is calculated as the ratio of nominal GDP to real GDP. The nominal GDP is calculated by multiplying the price and quantity for the given years across the goods and adding it up. Real GDP is calculated by multiplying the base-year prices with the current year quantity across the goods and adding it up. The real GDP and nominal GDP for the two years are calculated as,

$Nominal GDP2015=\$400×10+\$2×14+\$8×18\\=\$4172\\Real GDP 2015=\$4172\\Nominal GDP 2016=\$300×10+\$10×14+\$9×18\\=\$3302\\Real GDP 2016=\$400×10+\$2×14+\$8×18\\=\$4172$

The real GDP and nominal GDP are equal for 2015 since 2015 is the base year. The GDP deflator for the two years is calculated as,

$GDP\space deflator\space 2015=\frac{Nominal \space GDP2015}{Real \space GDP2015}×100\\=\frac{4172}{4172}×100\\=100\\GDP\space deflator 2016=\frac{Nominal \space GDP2016}{Real\space GDP2016}×100\\=\frac{3302}{4172}×100\\=79.15$

Therefore the price index for 2015 is 100 and the price index for 2016 is 79.15

a) The inflation rate can be calculated as the rate of change of price index from 2015 to 2016.

$Inflation=\frac{GDP\space deflator2016−GDP\space deflator2015}{GDP\space deflator2015}×100\\\frac{79.15−100}{100}×100\\−20.85$

The inflation rate is -20.85 percent. The inflation in the economy is negative, that is deflation. Therefore the real value of the goods and services in the economy has increased over the period and money has become more worth.

2.

decrease in human capital decreases the average GDP growth thereby affecting economic growth negatively.