Question

Between 2015 and 2016, the country of South Dantoine experienced a growth rate of -1.8%. If nominal GDP had increased by 3.6% and the population growth was recorded as 0.9%, then calculate the annual inflation rate in South Dantoine. Give your answer to one decimal.

Answer 1

Step 1:

Real per capita GDP = Real GDP / population   ---- 1)

Real GDP = Nominal GDP / Price index   ---- 2)

Step 2:

Taking growth rates of 1) and 2), as 3) and 4) respectively:

Growth in per capita GDP = Growth in Real GDP minus Growth in population ---- 3)

Growth in Real GDP = Growth in Nominal GDP minus Inflation rate    ---- 4)

Step 3:

Substituting the RHS of 4) in LHS of 3)

Growth in per capita GDP = [Growth in Nominal GDP minus Inflation rate] minus [Growth in population]

-1.8% = 3.6% - inflation rate - 0.9%

-1.8% = 2.7% - inflation rate

Inflation rate = 4.5%

The inflation rate in South Dantoine is 4.5%