ECON 1BB3 Lecture Notes - Lecture 10: Gdp Deflator, Interest Rate, Savings Account

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ultramarinehorse543

16 Jan 2017

School

McMaster University

Department

Economics

Course

ECON 1BB3

Professor

Bridget O' Shaughnessy

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ECON 1BB3 Full Course Notes

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Gdp increases if more products/services are sold in market. Gdp increases if prices increase or if output increases. Real gdp vs. nominal gdp (base year prices vs. current year prices) Gdp deflator: a measure of the price level. Gdp deflator = nominal gdp/real gdp x 100. Consumer price index (cpi): measures overall cost of goods for a (cid:498)typical(cid:499) household. It is a measure of the price level. Steps to calculating inflation using cpi: fix the basket of goods, calculate cpi: Cpi = cost of basket in current year/ cost of basket in base year x 100: inflation rate = (pt-pt-1/pt-1 x100) Cola = cost of living allowance allow for the real dollar value that people are getting to remain constant over time (using cpi) Problems with cpi x = (118. 7x50000)/61. 8 = . Cpi vs gdp deflator improvements; overstates inflation: unmeasured quality change some price changes reflect quality, cpi goods and services bought by typical consumers.

Related Questions

1.Consider an economy in which only food, clothing, and computers are produced. The established market basket is the following: 300 food, 40 clothing, 1 computer.

Quantities			Prices
Food	Clothing	Computers	Food	Clothing	Computers
5000	600	50	$4	$20	$600
5500	700	75	$5	$22	$500

Year

2013

2014

Using 2014 as the base year, calculate:

a)The nominal GDP in 2013 and 2014, as well as the nominal GDP growth rate.

b)The real GDP in 2013 and 2014, as well as the real GDP growth rate.

c)The GDP deflator in 2013 and 2014, as well as the GDP deflator inflation rate.

d)Calculate the CPI in 2013 and 2014, as well as the CPI inflation rate.

byzantiumbutterfly960

	karaoke machine	karaoke machine	CDs	CDs
year	quantity	Price	Quantity	Price
2013	20	$50	100	$15
2014	30	$90	150	$20

a. Calculate CPI and compute the inflation rate of CPI. Use 2013 as the base year, and fix the basket at 1 karaoke machines and 3 CDs.

b. Calculate GDP deflator and compute the inflation rate using GDP deflator. Also use 2013 as the base year.

c. Is the inflation rate in 2014 the same using the two methods? Explain why or why not.

Suppose that the are two goods in the economy, Xylophones (X) and Yams (Y). In year t, consumers in the economy purchase 20 Xylophones at a price of $20 each and 100 Yams at a price of $2 each. In year t + 1, consumers in the economy purchase 18 Xylophones at a price of $30 each and 150 Yams at a price of $2.50 each.

1. Calculate the GDP deflator in years t and t + 1 with base year t. What is inflation according to this deflator? Show each step. (Hint: it will be helpful for you to first calculate nominal and real GDP in years t and t + 1. When you calculate real GDP, make sure that you use the appropriate base year).

2. Calculate the GDP deflator in years t and t + 1 with base year t + 1. What is inflation according to this deflator? Show each step. (Hint: you will need to calculate real GDP in years t and t + 1 using a different base year than you used in part 1. Once you calculate real GDP with the appropriate base year, you will follow the same steps that you did in part 1.)

3. Compare your answers to a and b above. Are they the same? If not, why not? How does chain-weighting address any potential difference?

4. Calculate the CPI in years t and t + 1, using year t as the base year.

5. Describe two ways in which the CPI differs from the GDP deflator.

6. There are several problems with using the CPI to calculate real GDP and measure growth. One of these problems is that the CPI does not account for changes in the quality of goods sold over time. A computer today is significantly more efficient than it was even just ten years ago, so even if the price of computers rise with inflation, you are getting significantly more computing power per dollar. How would this bias estimates of GDP growth and inflation?

ECON 1BB3 Lecture Notes - Lecture 10: Gdp Deflator, Interest Rate, Savings Account

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