Question

7.a. What is inflation between 2013 and 2014 using CPI? Show all work.

b. What is inflation between 2014 and 2015 using the GDPD? Show all work.

	Q of futons	P of futons	Q of beds	P of beds
2013(base year)	20	9	15	18
2014	22	12	16	20
2015	25	13	16	23

Answer 1

Ans) 1) Cost of market basket in 2013 = (20×9) + (15×18)

= 180 + 270 = 450

Cost of market basket in 2014 = (22×12) + (16×20)

= 264 + 320 = 584

CPI in base year is always 100. So, CPI in 2013 is 100.

CPI in 2014 = (cost of market basket in given year ÷ cost of market basket in base year) × 100

= (584 ÷ 450)×100 = 129.78

Inflation rate = [(CPI2-CPI1)/CPI 1]×100

= [(129.78 - 100)/100]×100 = 29.78%

2) Nominal GDP = P1Q1 + P2Q2

Real GDP = quantity in given year × price in base year

Nominal GDP in 2014 = (22×12)+(16×20) = 584

Real GDP in 2014 = (22×9)+(16×18) = 486

GDP deflator = (nominal GDP/ real GDP)×100

= (584÷486)×100 = 120.165

Nominal GDP in 2015 = (25×13) + (16×23) = 693

Real GDP in 2015 = (25×9)+(16×18) = 513

GDP deflator = (693/513)×100 = 135.088

Inflation rate = [(GDPD2 - GDPD1)/GDPD1]×100

= [(135.088 - 120.165)/120.165]×100 = 12.42%