Measuring the Econo17

Measuring the Econo17 - period 1 to period 3 was 16%....

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Measuring the Economy Calculating Inflation Using the GDP Deflator The other major price index used to determine the price level is the GDP deflator, a price index that shows how much of the change in the GDP from a base year is reliant on changes in the price level. For example, let's calculate, using the table above, the GDP deflator for Country B in period 3 using period 1 as the base year. In order to find the GDP deflator, we first must determine both nominal GDP and real GDP in period 3. Nominal GDP in period 3 is (10 X $2) + (9 X $6) = $74 and real GDP in period 3 using period 1 as the base year is (10 X $1) + (9 X $6) = $64. The ratio of nominal GDP to real GDP is ($74 / $64 ) - 1 = 16%. This means that the price level rose 16% from period 1, the base year, to period 3, the comparison year. Thus, the inflation rate from
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Unformatted text preview: period 1 to period 3 was 16%. Notice that it is important to use the earlier year that you want to compare as the base year in the calculation of real GDP. The Effects of Inflation There are two general categories of effects due to inflation. The first group of effects are caused by expected inflation. That is, these effects are a result of the inflation that economists and consumers plan on year to year. The second group of effects are caused by unexpected inflation. These effects are a result of inflation above and beyond what was expected by economics and consumers. In general, the effects of unexpected inflation are much more harmful than the effects of expected inflation....
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