3. Consider an economy that produces oranges and boomerangs. The prices and quan

Question

3. Consider an economy that produces oranges and boomerangs. The prices and quantities of these

a. Using the data in Question 3, calculate the rate of inflation from 2016-2017 based on the GDP deflator with base year 2016.

b. Calculate the rate of inflation from 2016-2017 based on the Consumer Price Index, assuming the 2016 quantities given in Question 3 are the consumer basket.

c. If they are different, why?

3. Consider an economy that produces oranges and boomerangs. The prices and quantities of these goods in two different years are reported in the table below. Fill in the missing entries. 2017 % change 2016-17 2016 100 20 106 Quantity of oranges Quantity of boomerangs Prices of oranges (dollars) Prices of boomerangs (dollars) 3 Nominal GDP Real GDP in 2016 prices 1.10 3.10

Explanation / Answer

3. % change in 2016-17

i) Quantity of oranges = (106 - 100)/100 x 100 = 6%

ii) Quantity of boomeranges = (22 - 20)/20 x 100 = 10%

iii) Price of oranges = (1.10 - 1)/1 x 100 = 0.10 x 100 = 10%

iv) Price of boomeranges = (3.10 - 3)/3 x 100 = 33.3%

Nominal GDP in 2016 = Price of orange x Qty of orange + Price of boomeranges x Qty of bommeranges

= 1 x 100 + 3 x 20 = 100 + 60 = $ 160

Nominal GDP in 2017 = 1.10 x 106 + 3.10 x 22 = 116.6 + 68.2 = $ 184.8

Real GDP in 2016 = Price in 2016 x Quantity of 2016 = Nominal GDP in 2016 = 160

Real GDP in 2017 = Price of base year i.e. 2016 x Quantity of current year =  1 x 106 + 3 x 22 = 106 + 66 = 176

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