Consider an economy that produces and consumes bread and automobilies , In the f
ID: 1092522 • Letter: C
Question
Consider an economy that produces and consumes bread and automobilies , In the following table are data for two different years
a)Using the year 2000 as the base year ,compute the following statistics for each year : nominal GDP ,real GDP ,the implicit price deflator for GDP ,and a fixed-weight price index such as the CPI
b)How much have prices risen between 2000 and 2010? Compare the answers given by the Laspeyres and Paasche price indexes. Explain the difference
c) Supopose you are a senator writing a bill to index Social Sewcurity and federal pensions. That is ,yout bill will adjust these benefits to offset changes in the cost of living. Will you use the GDP deflator or the CPI? Why?
YEAR 2000 YEAR 2000 YEAR 2010 YEAR 2010 GOOD QUANTITY PRICE QUANTITY PRICE AUTOMOBILES 100 $50000 120 $60.000 BREAD 500.000 $10 400.000 $20Explanation / Answer
Using the year 2000 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the implicit price deflator for GDP, and a fixed-weight price index such as the CPI.
Nominal GDP2000 = ( Pcars2000 * Qcars2000 ) + ( Pbread2000 * Qbread2000 )
= $10,000,000
Nominal GDP2010 = ( Pcars2010 * Qcars2010 ) + ( Pbread2010 * Qbread2010 )
= $15,200,000
Real GDP2010 = ( Pcars2000 * Qcars2010 ) + ( Pbread2000 * Qbread2010 )
= $10,000,000
Implicit Price Deflator2010 = Nominal GDP2010 / Real GDP2010 = 1.52
CPI2010 = ( Pcars2010 * Qcars2000 ) + ( Pbread2010 * Qbread2000 )
( Pcars2000 * Qcars2000 ) + ( Pbread2000 * Qbread2000 )
= 1.6