Cost of 2005 basket at 2006 prices = $110 x 15 + $1.25 x 1,000 = $(1,650 + 1,250
ID: 1215491 • Letter: C
Question
Cost of 2005 basket at 2006 prices = $110 x 15 + $1.25 x 1,000 = $(1,650 + 1,250) = $2,900
Value of price index = ($2,900 / $2,500) x 100 = 1.16 x 100 = 116
**Price index in base year = 100
% increase in credit hours price = ($110 / $100) - 1 = 1.1 - 1 = 0.1, or 10%
% increase in hamburger price = ($1.25 / $1) - 1 = 1.25 - 1 = 0.25, or 25%
So price of hamburger rose more rapidly.
Calculating the GDP deflator Imagine the figures above refer to the nation's entire output. What would the cost of the 2006 market basket have been if prices had remained at their 2005 levels?______What is nominal GDP in 2006?______What is the GDP deflator in 2006 (using 2005 as the base year)?______What is the inflation rate in 2006?______Explanation / Answer
a. Cost of 2006 market basket at 2005 prices = $100 * 12 + $1 * 600 = $1200 + $600 = $1800
b. Nominal GDP in 2006 = Price of credit hours * Quantity of credit hours + Price of hamburgers * Quantity of hamburgers = $110 * 12 + $1.25 * 600 = $1320 + $750 = $2070
c. GDP deflator of 2006 = Nominal GDP of 2006/ Real GDP of 2006 * 100
Base year is 2005
Real GDP of 2006 = Price of credit hours in 2005 * Quantity of credit hours in 2006 + Price of hamburgers in 2005 * Quantity of hamburgers in 2006 = $100 * 12 + $1 * 600 = $1200 + $600 = $1800
Thus, GDP deflator of 2006 = Nominal GDP of 2006/ Real GDP of 2006 * 100 = $2070/$1800 * 100 = 115
d. Inflation rate in 2006 = CPI of 2006 - CPI of 2005)/CPI of 2005 * 100
CPI = Consumer Price Index
or
Inflation rate in 2006 = Percentage change in index/Initial value of index