Question

Suppose you have the following data on prices and quantities transacted:

Prices (in Euros)

	Appels	Pears	Petrol
2006	1.0	2.0	5.0
2007	1.0	3.0	6.0

Quantities

	Appels	Pears	Petrol
2006	300	100	50
2007	400	150	40

If the econmey produced all three (and only these three) goods, compute nominal GDP in both periods, and real GDP at 2006 prices. What is the rate of inflation in 2007, as measured by the change in the GDP Deflator?

Answer 1

(a) Nominal GDP = Sum of (Current year price x Current year quantity)

2006: (1 x 300 + 2 x 100 + 5 x 50) = 300 + 200 + 250 = 750

2007: (1 x 400 + 3 x 150 + 6 x 40) = 400 + 450 + 240 = 1,090

(b) Real GDP = Sum of (Base year (2006) price x Current year quantity)

2006: (1 x 300 + 2 x 100 + 5 x 50) = 300 + 200 + 250 = 750

2007: (1 x 400 + 2 x 150 + 5 x 40) = 400 + 300 + 200 = 900

(c) GDP Deflator = (Nominal GDP / Real GDP) x 100

2006: (750/750) x 100 = 100

2007: (1,090/900) x 100 = 121.11

Inflation rate = % Change in GDP deflator = (121.11/100) - 1 = 1.2111 - 1 = 0.2111 = 21.11%