Question

An economy produces two goods, x and y. A year ago the price of x was $4 and the price of y was $6. Today the price of x is $8 and the price of y is $10. What happened to the nominal and the real value of good x? What happened to the nominal and real value of good y?

Answer 1

(A) For good x,

(i)

Nominal value increased by [($8 / $4) - 1] = (2 - 1) = 1 = 100%.

(ii)

Real value a year ago = ($6 / $4) = 1.5 units of good y

Real value now = ($10 / $8) = 1.25 units of good y

Real value changed by [(1.25 / 1.5) - 1] = 0.8333 - 1 = - 0.1667 = - 16.67% (decreased by 16.67%).

(B) For good y,

(i)

Nominal value increased by [($10 / $6) - 1] = (1.6667 - 1) = 0.6667 = 66.67%.

(ii)

Real value a year ago = ($4 / $6) = 0.67 units of good x

Real value now = ($8 / $10) = 0.8 units of good x

Real value changed by [(0.8 / 0.67) - 1] = 1.1940 - 1 = 0.1940 = 19.40% (increased by 19.40%).