Econland produces Computers and Wheat, as described in the table below. All pric
ID: 1188874 • Letter: E
Question
Econland produces Computers and Wheat, as described in the table below. All prices are in nominal terms.
Market Basket = 16 computers, 20 lb wheat Base Year=2010
_______________________
Year: 2005
Computers Produced: 85
Nominal Price of Computer: $400
Units of Wheat Produced: 60
Nominal Price of Wheat: $3
________________________
Year: 2010
Computers Produced: 91
Nominal Price of Computer: $420
Units of Wheat Produced: 58
Nominal Price of Wheat: $4.5
_________________________
Year: 2015
Computers Produced: 100
Nominal Price of Computer: $500
Units of Wheat Produced: 59
Nominal Price of Wheat: $5.1
____________________________
1. What is the Real GDP in 2015?
2. What is the average GDP inflation during this entire period?
3. What is CPI inflation from 2005 to 2015?
Explanation / Answer
a. base year = 2010
Real GDP in 2015 = Output of 2015 * Price level of 2010
= 100 * 420 + 59 * 4.5 = 42000 + 265.5 = 42,265.5
b. Real GDP in 2005:
Real GDP in 2005 = output of 2005 * Price level of 2010
= 85 * 420 + 60 * 4.5 = 35700 + 270 = 35,970
Annual GDP growth rate during the 10 year period = (42265.5/35970)^(1/10) - 1 = 0.01625 or 1.625% per annum
c. Price of basket in 2005: 16*400 + 20 * 3 = 6,460
Price of basket in 2010 (Base Year): 16*420 + 20 * 4.5 = 6720 + 90 = 6810
Price of basket in 2015: 16 * 500 + 20 * 5.1 = 8000 + 102 = 8102
CPI inflation from 2005 to 2015 = Inflation from 2005 to 2010 + inflation from 2010 to 2015
Inflation from 2005 to 2010 : (Basket price in 2010 - Basket price in 2005)/Basket price in 2010* 100 = (6810-6460)/6810 * 100 = 5.14%
Inflation from 2010 to 2015: (basket price in 2015 - basket price in 2010)/Basket price in 2010 * 100 = (8102 - 6810)/6810 * 100 = 18.97%
Total inflation from 2005 to 2015 = 5.14% + 18.97% = 24.11% over the 10 year period
Annual inflation = (1.2411)^(1/10) - 1 = 2.18% per annum
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