homework #2 - Chien Chiu Hsiung Econ 2100 March 21, 2011...

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Chien Chiu Hsiung Econ 2100 March 21, 2011 Chapter 7 problem 12 The GDP deflator is a measure of the level of price of all domestically produced final goods and services in an economy. The GDP deflator for a given year is 100 times the ratio of nominal GDP to real GDP in that year. To calculate the GDP deflator, you divide Nominal GDP by Real GDP multiply by 100. Unlike consumer price index and producer price index, GDP deflator is not based on a fixed basket of goods and services. The basket of consumer goods is allowed to change with people's consumption and investment patterns. For GDP, the basket for each year is the set of all the goods produced domestically is weighted by the market value of the total consumption of each good. Therefore, new spending patterns are allowed to show up in the deflator as people react to changing prices. The GDP deflator reflects up to date expenditure patterns. For example, the price of pork increases relative to the price of chicken, then people will more likely to spend more money on chicken as a substitute for pork. In practice, the
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homework #2 - Chien Chiu Hsiung Econ 2100 March 21, 2011...

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