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MGEA06H3 (157)
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Lecture

# ECMA06_Tutorial_2_Solution.doc

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School
University of Toronto Scarborough
Department
Economics for Management Studies
Course
MGEA06H3
Professor
Iris Au
Semester
Summer

Description
ECMA06 Tutorial #2 Answer Key Question 1 Part (a) • Base year = 2004. Consumer price index (CPI): • To compute the CPI, we use the base year bundle, i.e., the 2004 bundle, and current year price. • Cost of bundle = ∑ P i, ti, base − yearere i = food, clothing; t = year ⇒ Cost of bundle 2004= \$10 × 180 + \$15 × 100 = \$3300 (this is also the cost of bundle in base year). ⇒ Cost of bundle 2005= \$12 × 180 + \$25 × 100 = \$4660 Cost of bundle t • CPI t Cost of bundle ×100 , where t = year base -year \$3300 ⇒ CPI 2004= \$3300 × 100 = 100 \$4660 × 100 ⇒ CPI 2005= \$3300 = 141.21 • Annual inflation rate = 141 .21 - 1 = .4121 (41.21%) 100 GDP deflator: • Current dollar GDP (we called it Nominal GDP) = t ∑ Pi, t i, twhere i = food, clothing; t = year ⇒ Nominal GDP 2004 \$10 × 180 + \$15 × 100 = \$3300 ⇒ Nominal GDP 2005 \$12 × 200 + \$25 × 64 = \$4000 • Constant dollar GDP (we called it Real GDP ) t ∑ P i, base -yi, t where i = food, clothing; t = year ⇒ Real GDP 2004 \$10 × 180 + \$15 × 100 = \$3300 ⇒ Real GDP 2005 \$10 × 200 + \$15 × 64 = \$2960 P t Q t Nominal GDP t • GDP deflator =t ×100 = ×100 , where t = year, P = trice Pbase -yeart Real GDP t vector, Qt= quantity vector \$3300 ⇒ GDP deflator 2004= × 100 = 100 \$3300 \$4000 ⇒ GDP deflator 2005= × 100 = 135.14 \$2960 135 .14 • Annual inflation rate = 100 - 1 = .3514 (35.14%) ECMA06 Tutorial #2 Answer Key 1 Part (b) • Current dollar GDP in 2004 = \$3300 • Current dollar GDP in 2005 = \$4000 • Constant dollar GDP in 2004 = \$3300 • Constant dollar GDP in 2005 = \$2960 Note: See part (a) for detailed calculation. • Since we know that using later year bundle (as the GDP deflator does) understates the inflation, and since this understatement has still left consumers with less real GDP in 2005, we can state that consumers are better off in 2004. • Note: This might not be true if we were using real GDP deflator, since it also includes a lot o items that consumers do not purchase such as investment goods and the like. Part (c) No, not all consume
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