Answer to Question #193328 in Microeconomics for hambisa

Question

6. Consider an economy that produces and consumes Bread and Automobile. Data for two

different years 2005 and 2010 is given in the following table.

Year 2005 2010Price of Automobiles $ 5000 $ 6000Price of a loaf of bread $10 $20Number of automobiles produced 100 120Number of loaves of bread produced 500,000 400,000

Answer 1

Nominal GDP (NGDP) = sum of (Current year price x Current year quantity)

Real GDP (RGDP) = sum of (Base year (2005) price x Current year quantity)

GDP Deflator = (NGDP / RGP) x 100

GDP deflator in base year = 100 (since NGDP = RGDP in base year

Inflation rate = % Change in GDP deflator

 

(a)Calculate the nominal and real GDP of 2010.

NGDP, 2005$= 5,000 \times 100 + 10 \times 500,000 = 500,000 + 5,000,000 = 5,500,000$

NGDP, 2010$= 6,000 \times 120 + 20 \times 400,000 = 720,000 + 8,000,000 = 8,720,000$

 

RGDP, 2005$= 5,000 \times100 + 10 \times500,000 = 500,000 + 5,000,000 = 5,500,000$

RGDP, 2010$= 5,000 \times120 + 10 \times 400,000 = 600,000 + 4,000,000 = 4,600,000$

(b) Find the value of GDP Deflator for the year 2010 and interpret.

GDP deflator $= (\frac{8,720,000}{ 4,600,000}) \times 100$

$= 189.57$

Since GDP deflator > 100, this means that the economy experienced inflation between 2005 and 2010.

(c). Calculate the inflation rate in 2010

Inflation rate $= (\frac{189.57}{100}) - 1$

$= 1.8957 - 1$

$= 0.8957= 89.57\%$

(d)compute CPI

cost of basket in 2005 $=5000\times100+10\times500000$

$=500000+5000000=5500000$

cost of basket in 2010 $=6000\times100+20\times500000$

$=600000+10000000=16000000$

CPI in 2005$=(\frac{5500000}{5500000})\times100=100$

CPI in 2010$=(\frac{16000000}{5500000})\times100=290.91$