Question

The calculators were sold for $27.00 apiece in 2018, and people bought 42 of them. The watches were sold for $23.00 apiece in 2018, and people bought 28 of them. The same calculators were sold for $35.00 apiece in 2019, and people bought 42 of them. The watches were sold for $29.00 apiece in 2019, and people bought 25 of them. There was nothing else produced or sold in the country in 2018 and 2019.

Calculate the CPI-based inflation rate from 2018 to 2019. Round to 4 decimals

Calculate the 2018 GDP Deflator using 2019 as a base year. Round to 2 decimals

Answer 1

Commodity	Price (2018)	Quantity (2018)	P*Q 2018	Price (2019)	Quantity (2019)	P*Q 2019
Calculator	27	42	1134	35	42	1470
Watches	23	28	644	29	25	725

No. of the calculator is the same for each year, however, only 25 watches are sold in 2019, so calulating the cost of 23 watches in 2018

CPI for the base year 2018 = 100

CPI for 2019 = (Cost of Market Basket in Given Year​/ Cost of Market Basket in Base Year)×100

CPI for 2019 = [(1470+725)/(1134+(23*25)=575)] *100 = [2195/1709]*100 = 128.4377

Inflation = [(CPI₂₀₁₉- CPI₂₀₁₈)/CPI₂₀₁₈] *100

Inflation = 128.4377-100 = 28.4377%

..

GDP deflator for 2018 with 2019 as base year (so prices of 2019 will be used)

The GDP deflator is nominal GDP/ Real GDP times 100

Real GDP for 2018 = Prices of 2019 * quantity of 2018

= (35*42) + (29*28) = 2282.

Nominal GDP of 2018 = (27*42) + (23* 28) = 1778

GDP deflator for base year = 100

GDP deflator = (1778/2282) *100 = 77.91