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Unformatted text preview: Solution to Problem 1 1. gG 10 $ 5 10 $ 20 8 $3 274 $ gG 7 $ 6 13 $ 25 11 $ 2.50 394.50 $ 2. gG 10 $ 5 10 $ 20 8 $3 274 $ gG 7 $ 5 13 $ 20 11 $ 3 328 $ 3. gG 1 gG . =1.2027 4. gG 19.71 % gG gG gG gG 1.2027 1 1 20.27 % 5. Lets use the notation from the lecture. The real GDP of the year t in prices of year l is denotes as: gG . Using this notation: gG gG gG 1.2027 328 394.50 The method of chaining links the real GDP figures for two different base years to each other. Therefore it computed the real GDP produced in period t on basis of prices from the year l by multiplying the real GDP produced in year t on basis of prices from year z by the price change between z and l. Solution to Problem 2 Nominal and real GDP in 1995 are identical. This is because 1995 has been chosen as the base year and the current prices of 1995 coincide with the prices of the same year. In fact the prices are identical because the prices of 1995 are the prices of the base year. Solution to Problem 3 1. The inflation rate is defined as the growth rate of the price level. Generally there are 2 measures for the price level: the GDP deflator and the CPI. The first measures the change in the ratio of nominal GDP to real GDP and hence includes prices of all goods produced within the economy, while the CPI reflects about aggregate of the price changes of all goods consumed within the economy. The only available data for our example economy is the GDP deflator. Thus we will use this one a s our measure of inflation. But we already the growth rate of the GDP deflator between 1995 and 2005 in 1.4. as 19.71 %. Hence our inflation rate GDP deflator between 1995 and 2005 in 1....
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This note was uploaded on 01/30/2009 for the course ECON 342934 taught by Professor Staff during the Fall '08 term at UCSD.
 Fall '08
 staff

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