Answer to Question #283641 in Microeconomics for Bayisa

Question

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. 2010

Price of Automobiles. 5000$. 6000$

Price of a loaf of

Bread. 10$. 20$

Number of Automobiles

Produced 100$. 120$

Number of loaves

Of bread produced. 500000$. 400000$

* Using the year 2005 as a base year ,

a. Calculate the nominal and real GDP of

2010

b. Find the value of GDP Deflator for the

year 2010 and interpret your result.

c. Calculate the inflation rate in 2010.

Answer 1

Solution:

a) The nominal GDP of 2010 is:

Yn = 6,000×120 + 20×400,000 = 8,720,000.

The real GDP of 2010 is:

Yn = 5,000×120 + 10×400,000 = 4,600,000.

b) The value of GDP Deflator for the year 2010 is:

Deflator = $\frac{8,720,000}{4,600,000\times100} =189.56$

So, the real GDP is almost twice lower than the nominal GDP.

c) The inflation rate in 2010 comparing to 2005 was 189.56 - 100 = 89.56%.