ECMA06_Tutorial_2_Solution

ECMA06_Tutorial_2_Solution - ECMA06 Tutorial#2 Answer Key...

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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 = year base i, t i, Q P - , where 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 CPI t = 100 bundle of Cost bundle of Cost year - base t × , where t = year CPI 2004 = 100 $3300 $3300 × = 100 CPI 2005 = 100 $3300 $4660 × = 141.21 Annual inflation rate = 1 - 100 21 141 . = .4121 (41.21%) GDP deflator: Current dollar GDP (we called it Nominal GDP t ) = t i, t i, Q P , where 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 ) = t i, year - base i, Q P , where i = food, clothing; t = year Real GDP 2004 = $10 × 180 + $15 × 100 = $3300 Real GDP 2005 = $10 × 200 + $15 × 64 = $2960 GDP deflator t = 100 Q P Q P t year - base t t × = 100 GDP Real GDP Nominal t t × , where t = year, P t = price vector, Q t = quantity vector
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