EBK ESSENTIALS OF ECONOMICS
EBK ESSENTIALS OF ECONOMICS
8th Edition
ISBN: 8220103599832
Author: Mankiw
Publisher: Cengage Learning US
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Chapter 16, Problem 5PA

Subpart (a):

To determine

Measuring percentage change in price using CPI and GDP deflator.

Subpart (a):

Expert Solution
Check Mark

Explanation of Solution

Cost of market for the basket can be calculated by using the following formula.

Cost of Market basket=((Price1×Quantity1)+(Price2×Quantity2)+...+(Pricen×Quantityn)) (1)

Substitute the respective values in Equation (2) to calculate the cost of market basket in the year 2017:

Cost of the market basket2017=1×40+3×10=70

Cost of market basket for the year 2017 is $70.

Substitute the respective values in Equation (2) to calculate the cost of market basket in the year 2018:

Cost of the market basket2018=1×60+3×12=96

Cost of market basket for the year 2018 is $96.

CPI can be calculated by using the following formula:

CPI      =Cost of Market basket in current yearPrice of basket in the base year×100 (2)

Substitute the respective values in Equation (2) to calculate the CPI in the year 2017:

CPI2017=7070×100=100

CPI in the year 2017 is 100.

Substitute the respective values in Equation (2) to calculate the CPI in the year 2017:

CPI2018=9670×100=137.14

CPI in the year 2018 is 137.14.

The overall change in price using CPI is calculated as follows:

Overall percentage change in price =CPIPresentCPIPreviousCPIPrevious×100=137.14100100×100=37.14%

Thus the overall change in price is 37.14% which is the inflation rate for 2018 computed using CPI. Thus the inflation rate for 2018 is 37.14%.

Economics Concept Introduction

Concept Introduction:

Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services for the present time from the base year.

Inflation rate: Inflation rate refers to the rate of change in the price level.

GDP deflator: Gross Domestic Product (GDP) deflator is the measure of inflation.

Real GDP: Real GDP refers to the market value of all final goods and services produced in an economy during an accounting year, and measured in constant prices.

Nominal GDP: Nominal GDP refers to the market value of all final goods and services produced in an economy during an accounting year, measured in current prices.

Subpart (b):

To determine

Measuring percentage change in price using CPI and GDP deflator.

Subpart (b):

Expert Solution
Check Mark

Explanation of Solution

The Nominal GDP can be calculated by using the following formula:

Nominal GDP=(Present price1×Quantity1)+(Present price1×Quantity2)+...+(Present pricen×Quantityn) (3)

Substitute the respective values in Equation (3) to calculate the nominal GDP in the year 2017:

Nominal GDP2017=(10×40)+(30×10)=700

Nominal GDP in the year 2017 is $700.

Substitute the respective values in Equation (3) to calculate the nominal GDP in the year 2018:

Nominal GDP2018=(12×60)+(50×12)=1,320

Nominal GDP in the year 2018 is $1,320.

The real GDP can be calculated by using the following formula:

Real GDP=(Base year price1×Quantity1)+(Base year price1×Quantity2)+...+(Base year pricen×Quantityn) (4)

Substitute the respective values in Equation (4) to calculate the real GDP in the year 2017:

Real GDP2017=10×40+30×10=700

Real GDP in the year 2017 is $700.

Substitute the respective values in Equation (4) to calculate the real GDP in the year 2017:

Real GDP2018=12×40+50×10=980

Real GDP in the year 2018 is $980.

GDP deflator can be calculated by using the following formula:

GDP deflator      =Nominal GDPReal GDP×100 (5)

Substitute the respective values in equation (5) to calculate the GDP deflator in year 2017:

GDP deflator2017=700700×100=100

GDP deflator in the year 2017 is 100.

Substitute the respective values in equation (5) to calculate the GDP deflator in year 2018:

GDP deflator2018=1320980×100=134.69

GDP deflator in the year 2018 is 134.69.

Using 2017 as base year, the GDP deflator for 2017 is calculated as 100 and for 2018 is 134.69.

The overall change in price using CPI is calculated as follows:

Inflation rate 2018=GDP deflatorPresentGDP deflatorPreviousGDP deflatorPrevious×100=134.69100100×100=34.69%

Thus the inflation rate for 2018 computed using GDP inflator is 34.69%.

Economics Concept Introduction

Concept Introduction:

Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services for the present time from the base year.

Inflation rate: Inflation rate refers to the rate of change in the price level.

GDP deflator: Gross Domestic Product (GDP) deflator is the measure of inflation.

Real GDP: Real GDP refers to the market value of all final goods and services produced in an economy during an accounting year, and measured in constant prices.

Nominal GDP: Nominal GDP refers to the market value of all final goods and services produced in an economy during an accounting year, measured in current prices.

Subpart (c):

To determine

Measuring percentage change in price using CPI and GDP deflator.

Subpart (c):

Expert Solution
Check Mark

Explanation of Solution

No, the inflation rate is not the same. It is calculated as 37.14% using CPI whereas it is found to be 34.69% when computed using GDP deflator. This is because, the rate of inflation computed by the CPI holds the basket of goods and services constant; and on the other hand, the GDP deflator allows it to change and holds the prices constant.

Economics Concept Introduction

Concept Introduction:

Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services for the present time from the base year.

Inflation rate: Inflation rate refers to the rate of change in the price level.

GDP deflator: Gross Domestic Product (GDP) deflator is the measure of inflation.

Real GDP: Real GDP refers to the market value of all final goods and services produced in an economy during an accounting year, and measured in constant prices.

Nominal GDP: Nominal GDP refers to the market value of all final goods and services produced in an economy during an accounting year, measured in current prices.

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Students have asked these similar questions
a) Discuss the problems with the Consumer Price Index.    b) 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.  kindly solve all the parts
Discuss how does the GDP relate to CPI, and how the GDP and CPI contribute toinflation. Write a short report with NO more than 400 words. You should relate the findings based on the line graphs of the GDP and CPI for Ethiopia and Germany, attached in the images.
As a result of a drought, prices and produced quantities in a country change as follows:  Assume that the economy produces and consumes only the above agricultural products.a) Calculate the nominal GDP and the real GDP for the year 2021 with the base year 2020.b) By how many percent have the prices of goods increased?c) Calculate the CPI for the year 2021 according to Laspeyres and Paasche.d) Describe the general differences between the CPI and the GDP deflator.
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