ECON202: Suggested Answerkey: HW Assignment #1
Price in 2000 Qty in
Price in 2010 Qty in 2010 Market Values
Nominal GDP: Y2000: $10M; Y2010: $15.2M
Real GDP: Y2000: $10M; Y2010: 120X50,000 + 400,000X10 = 6M +4M = $10M
GDP Deflator: Y2000: 1; Y2010: 15.2/10 = 1.52 or, 152%
CPI Index: (15,200,000)/(10,000,000) = 152% which is same, why?
The price went up by 152% under fixed weighted basket (Laspeyres index). The
price index under Paasche index is happened to be the same because the basket with
its items has not changed over the period.
I would use the CPI index to make the adjustment for cost of living because the CPI
index represents the bundle of goods and services for consumers only. The GDPD,
on the other hand, represents the changes in prices of all goods and services in the
US economy. Therefore, GDPD measure is based on changes in capital goods and
government purchases as a part of the total measures which consumers never buy.
Hence, the use of CPI index in adjusting the cost of living is more appropriate.
Year Price of
Qty of Red
Total Purchase Price of Green
Qty of Green
The CPI for year 1 is 100 because it is the base year. The CPI index for year 2 is
also same because the net effect of changes in price is zero with fixed weighted
measure of CPI index.