Good 2012  Price  2012  Quantity 2013  Price  Quantity ...

Question

# Good 2012  Price  2012  Quantity 2013  Price  Quantity ...

Suppose that we are in a small, local economy that produces four goods. They are: (i) Gasoline, (ii) Water, (iii) Fruit, and (iv) Clothes. The quantity and prices for reach of these goods from 2012-2014 are above.

Given the above data, answer the following questions:

1. What is the Nominal GDP in this economy for the years 2012, 2013, and 2014?

2. What is the Real GDP in this economy for the years 2012, 2013, and 2014? use 2014 as the base year for these calculations.

3. What is the Real GDP in this economy for the years 2012, 2013, and 2014? use 2012 as the base year for these calculations.

4. What is the annual percent growth rate in Real GDP for 2013 and 2014, using either
2012 or 2014 as the base year? Does the choice of the base year matter for your
answer? Why is this the case?

5. Why is it that Nominal GDP is rising more quickly than Real GDP in this example?

Now suppose that we will keep using the same data as above, but will focus on constructing a Consumer Price Index (CPI).

Suppose that the Central Bank defines a representative bundle of goods for a household that will form the basis of the CPI as:

• 10 units of Gasoline
• 20 units of water
• 20 units of fruits
• 5 units of clothes

6. What is the cost of this representative bundle in 2012, 2013, and 2014?

7. Calculate the CPI for 2012, 2013, and 2014 using 2012 as the base year.

8. What is the annual rate of inflation for 2013 and 2014? Does the choice of the base year affect these calculations? Why or why not?

Suppose that we are instead interested in calculating a Core CPI for this economy.

9. What would be the inflation rate for 2013 using the Core CPI instead of the general CPI?

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