Consider a nation obsessed with Coke Studio. All they produce and consume are DVDs and karaoke mics, in the following amounts: Karaoke Mics DVDs            Quantity   Price   Quantity   Price 2020       10     Rs.4,000      30      Rs.1,000 2021       12         6,000       50          1,200 Using a method similar to the CPI, compute the percentage change in the overall price level. Use 2020 as the base year and fix the basket at 3 DVDs and 1 karaoke mic. Using a method similar to the GDP deflator, compute the percentage change in the overall price level. Again, use 2020 as the base year. Is the inflation rate in 2021 the same using the two methods? Explain why or why not.

Question


Consider a nation obsessed with Coke Studio. All they produce and consume are DVDs and karaoke mics, in the following amounts:

Karaoke Mics DVDs
           Quantity   Price   Quantity   Price
2020       10     Rs.4,000      30      Rs.1,000
2021       12         6,000       50          1,200

  • Using a method similar to the CPI, compute the percentage change in the overall price level. Use 2020 as the base year and fix the basket at 3 DVDs and 1 karaoke mic.
  • Using a method similar to the GDP deflator, compute the percentage change in the overall price level. Again, use 2020 as the base year.
  • Is the inflation rate in 2021 the same using the two methods? Explain why or why not.

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