Question

Placerville is a small country that produces only 4 products: shoes, hamburgers, and shirts.  

	2012 (Base Year)		2018		2019
Product	Quantity (Units)	Price Per Unit	Quantity (Units)	Price Per Unit	Quantity (Units)	Price Per Unit
Shoes	90	$50.00	100	$60.00	100	$65.00
Hamburgers	75	2.00	100	2.00	120	2.25
Shirts	50	30.00	50	25.00	65	25.00

1. Use the information in the table above to calculate nominal GDP in 2012, 2018 and 2019.

2. Use the information in the table above to calculate RGDP in 2018 and 2019 if 2012 is the base year.

3. Calculate the GDP Deflator for 2012, 2018 and 2019.

4. Calculate the rate of inflation between 2018 and 2019. Identify the variable used to measure inflation.

5. Calculate the rate of growth of output between 2018 and 2019. Identify the variable used to measure the growth of output.

6. Assume the information in the table reflects a market basket of goods and services bought by the typical urban consumer. Further assume that 2012 is the base year. Calculate the CPI in 2012, 2018 and 2019.

7. Using the CPI, calculate the rate of inflation between 2018 and 2019.

8. Describe two biases that exist in the calculation of the CPI. Use the information in the table above to illustrate the two biases you discuss.

9. In 50-150 words describe why inflation matters. In your explanation, I am looking for at least 2 explicit reasons. Providing examples of those reasons in your explanation rather than just listing reasons will result in higher grades.

Answer 1

Nominal GDP 2012=90*50+75*2+50*30=$6150

2018 =100*60+100*2+50*25=$7450

2019=100*65+120*2.25+65*25=$8395

Real GDP for 2012 =$6150=Nominal GDP as base year

RGDP for 2018 at 2012 price =100*50+100*2+50*30=$6700

RGDP for 2019 at 2012 price= 100*50+120*2+65*30=$7190

GDP Deflator for 2012 =NGDP*100/RGDP=6150*100/6150=100

For 2018=7450*100/6700=111.194

Fir 2019=8395*100/7190=116.7594

Between 2018 to 2019 using GDP Deflator inflation can be calculated as (116.7594-111.194)*100/111.194=5.0051%