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Suppose there are three goods in an economy, namely pencils, mobile phones and capital goods for production
Suppose there are three goods in an economy, namely pencils, mobile phones and capital goods for production. In both Year 1 and Year 2, the production of goods and services in this economy consists of 300 pencils, 200 mobile phones and 100 units of capital goods used for production. Answer the following questions. Please show all the steps you use to arrive at your answers. Pencils Mobile phones Capital goods for production $10 $150 $210 Year 1 price Year 2 price $12 $140 $200 i Find the nominal GDP for the current year and base year. (5 marks) ii What is the percentage increase in the CPI? (5 marks) iii What is the percentage increase in the GDP deflator?
Expert Solution
(i) Nominal GDP of Base year
= 300 × 10 + 200× 150 +100× 210
= 3000+30000+21000
= $ 54000
Nominal GDP of Current year
= 300×12+ 200×140+ 100×200
= 3600+28000+20000
= $ 51600
(ii) CPI in year 1 = 100%
CPI in year 2 = 51600/54000×100
= 95.55%
Therefore percentage change in CPI is
100-95.55 %= 4.45%
(iii) GDP deflator = Nominal GDP/Real GDP × 100
Real GDP of year1 = $ 54000
GDP deflator of year 1 = 100%
Real GDP of year 2= $ 54000
GDP deflator of year 2 = 51600/54000×100
= 95.55%
Therefore, Percentage increase in GDP deflator is ----. -(4.45%)
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