Problem Set 2.pdf

# 2the introduction of new technology how can we

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2)The introduction of new technology. How can we compare the prices of aggregate goods and services that did not exist in the base year such as tech support and cellphones? 3)Due to the introduction of new goods, the old ones tend to become obsolete. For example, the introduction of the car made carriages obsolete. Problem 1 Hamburgers and beer are the sole goods in a simple economy. In year 1 a hamburger costs \$5.0 and a beer \$2.0, whereas in year 2 a hamburger costs \$10.0 and a beer \$2.0. In year 1, 10 hamburgers are produced and 10 beers are produced. In year 2, 6 hamburgers are produced and 8 beers are produced. The basket of goods defining the Consumer Price Index (CPI) is 10 hamburgers and 10 beers. 1. Calculate the nominal GDP in period 1 and period 2. Period 1=5(10)+2(10)= 70

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Period 2=10(6)+2(8)=76 2. Calculate the real GDP in period 1 and period 2 when year 1 is treated as the base year. Period 1= 70 Period 2=6(5)+8(2)=46 3. Calculate the real GDP in period 1 and period 2 when year 2 is treated as the base year. Period 1= 10(10)+10(2)=120 Period 2=76 4. Calculate the growth rates of real GDP using a chain-weighting approach. -The growth rate of GDP with period 1 (46-70)/(70)=-0,343 thus the growth rate is -34.3% Period two (76-120)/120=-0.3667 thus -36,667% Average= -35.47% Therefore -34.3<-35.46<-36.667 5. Calculate the rate of inflation using the implicit GDP price deflator when year 1 is treated as the base year. Year 1= 100 Year 2= 76/46=165.217 Inflation rate (165.271-100)/100(100)= 65.21% 6. What is the CPI in year 1 and year 2, when year 1 is treated as the base year? Year 1= 100 Year 2= 120/70(100)=171.42 7. Does the change in the CPI between year 1 and 2 overstate, understate or correctly state the change in the “cost of living”? Explain carefully. Change in CPI in year 1 and 2 overstate the “cost of living”. GDP deflator cost of living is 65.21% whereas CPI is 71.4%
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• Fall '18
• Inflation, gross domestic product, Consumer price index, GDP deflator, base year matter

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