There are various methods in literature that countries use in calculating nation

Question

There are various methods in literature that countries use in calculating national income. Assume a simple economy that produces only two goods; maize and fish. Using 2015 as the base year.

Goods

2015

2016

2017

2018

Maize Quantities

700

900

1000

950

Fish Quantities

500

1000

900

750

Price of Maize

K65

K70

K80

K90

Price of Fish

K50

K70

K90

K120

Nominal GDP

Real GDP

  

a)         Fill in the missing cells in the above table. Clearly show your work.    

b)         Find the growth rate of nominal GDP for 2016, 2017 and 2018.

c)         Find the growth rate of real GDP (using 2015 K) for 2016, 2017 and 2018.

d)         Compute inflation using GDP deflator (using 2015 K) for 2016, 2017, and 2018.

e)         What are the major differences between the GDP deflator and the CPI?                                                                                                                            

Goods

2015

2016

2017

2018

Maize Quantities

700

900

1000

950

Fish Quantities

500

1000

900

750

Price of Maize

K65

K70

K80

K90

Price of Fish

K50

K70

K90

K120

Nominal GDP

Real GDP

Explanation / Answer

A.

Working note:

For 2015,

Nominal GDP = 700*65+500*50 = K70500

Real GDP = 700*65+500*50 = K70500

For 2016,

Nominal GDP = 900*70 + 1000*70 = K133000

Real GDP = 900*65+1000*50 = K108500

For 2017,

Nominal GDP = 1000*80 + 900*90 = K161000

Real GDP = 1000*65+ 900*50 = K110000

For 2018,

Nominal GDP = 950*90 + 750*120 = K175500

Real GDP = 950*65+ 750*50 = K99250

B.

Nominal GDP growth rate for 2016 = (133000-70500)/70500 = 88.65%

Nominal GDP growth rate for 2017 = (161000-133000)/133000 = 21.05%

Nominal GDP growth rate for 2018 = (175500-161000)/161000 = 9.0%

C.

Real GDP growth rate for 2016 = (108500-70500)/70500 = 53.9%

Real GDP growth rate for 2017 = (110000-108500)/108500 = 1.38%

Real GDP growth rate for 2018 = (99250-110000)/110000 = -9.77%

D.

GDP deflator in 2015 = 100

GDP deflator in 2016 = 133000*100/108500 = 122.58

GDP deflator in 2017 = 161000*100/110000 = 146.36

GDP deflator in 2018 = 175500*100/99250 = 176.83

So,

Inflation rate in 2016 = (122.58 – 100)/100 = 22.58%

Inflation rate in 2017 = (146.36 – 122.58)/122.58 = 19.4%

Inflation rate in 2018 = (176.83 - 146.36)/146.36 = 20.82%

E

The first difference is that CPI is focused upon a basket of goods, but GDP deflator considers the GDP to calculate the inflation that includes all the products & services produced in the country in a financial year. Further, CPI does not consider real value of GDP, but it is considered by GDP deflator.

Goods 2015 2016 2017 2018 Maize Quantities 700 900 1000 950 Fish Quantities 500 1000 900 750 Price of Maize (K) 65 70 80 90 Price of Fish (K) 50 70 90 120 Nominal GDP(K) 70500 133000 161000 175500 Real GDP (K) 70500 108500 110000 99250

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