Suppose we have an economy in which there are only two services produced: ballet

ID: 1151809 • Letter: S

Question

Suppose we have an economy in which there are only two services produced: ballet classes and spinning classes.

The prices per class and quantities consumed for the years 2016 and 2017 are given in the following table:

a. Calculate the equivalent of current dollar GDP for this economy in 2016 and in 2017.

b. Determine the equivalent of the CPI (use 2016 as the base) for 2016 and for 2017 in this economy.

c. Compute the equivalent of the GDP deflator (again use 2016 as the base) for 2016 and 2017 in this economy.

d. Calculate the rate of price increase from 2016 to 2017 using the two different price indexes.

2016 2017 Ballet Ballet Quantity Price Quantity Price Quantity Price Quantity Price 80 $2

a.Current dollar GDP (2016) = 50*15 + 30*18 = 1290. Current dollar GDP (2017) = 65*20 + 80*25 = 3300

b. Cost of basket in 2016 = 50*15 + 30*18 = 1290. Cost of basket in 2017 = 50*20 + 30*25 = 1750.

CPI 2016 =1290/1290 = 100. CPI 2017 = 1750/1290 = 135.66

c. Nominal GDP and Real GDP in 2016 = 1290. Nominal GDP in 2017 = 3300.

Real GDP in 2017 = 65*15 + 80*18 = 2415.

GDP deflator in 2016 = Nominal GDP 2016 / Real GDP 2016 = 1290/1290 = 100.

GDP deflator in 2016 = Nominal GDP 2016 / Real GDP 2016 = 3300/2415 = 136.65

d. The rate of price increase from 2016 to 2017 using CPI is (135.66 - 100)*100/100 = 35.66% and using GDP deflator = (136.65 - 100)*100/100 = 36.65%