Question

Please answer the following.

Suppose the economy only consumes the following two goods:

Year	Iced Tea Price	Iced Tea Quantity	Coffee Price	Coffee quantity
2010	5	6	3	10
2012	6	4	2	12
2015	4	5	5	8

What is the nominal GDP for each year? (1)

Using 2010 as a base year, what is the real GDP (1)

Using the GDP deflator, what is the inflation between the years? (2)

What are some issues with using the GDP deflator when calculating inflation? (1)

Answer 1

Nominal GDP = current year output * current year price

2010: 6*5 + 10*3 = 60

2012: 4*6 + 12*2 = 48

2015: 5*4 + 8*5 = 60

Real GDP = current year output * base year price (2010 is the base year)

2010: 6*5 + 10*3 = 60

2012: 4*5 + 12*3 = 56

215: 5*5 + 8*3 = 49

GDP deflator = (Nominal GDP / Real GDP)*100

2010: (60/60)*100 = 100

2012: (48/56)*100 = 85.71

2015: (60/49)*100 = 122.44

Inflation between 2010 and 2012 = (85.71 - 100 / 100)*100 = - 14.29%

Inflation between 2012 and 2015 = (122.44 - 85.71 / 85.71)*100 = 42.85%

GDP delftaor ususally overestimates the value of inflation as it usues all the goods and services in the econommy as comapred to CPI which uses a regularly used basket of consumption goods. It is for the same reason very hard to calculate on a regular basis.