Measuring the Economy 2: Problems 1

Problem :

Figure %: Goods and Services Consumed in Country B

Compute the inflation in Country B from period 1 to period 2.

The percent change in the price level (inflation) from the base year to the comparison year is calculated by subtracting 100 from the CPI of the comparison year. In this example, the CPI in period 1 is 100 and the CPI in period 2 is 141. The percent change in the price level from period 1 to period 2 is 141 - 100 = 41%.

Problem : Compute the inflation in Country B from period 1 to period 3.

The percent change in the price level (inflation) from the base year to the comparison year is calculated by subtracting 100 from the CPI of the comparison year. In this example, the CPI in period 1 is 100 and the CPI in period 3 is 182. The percent change in the price level from period 1 to period 3 is 182 - 100 = 82%.

Problem : Compute the inflation in Country B from period 2 to period 3, using period as the base year.

The CPI for period 2 was 141 and the CPI for period 3 was 182. Since the base year for these CPI calculations was period 1, we must use the method of calculating inflation that takes into account the presence of two comparison years: we need to subtract the CPI for the later year from the CPI for the earlier year and then divide by the CPI for the earlier year. That gives (182 - 141) / 141 = 0.29 or 29%.

Problem : Calculate the GDP deflator for Country B in year 3 using year 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, the GDP deflator, is ( $74 / $64 ) - 1 = 16%.

Problem : What is the rate of inflation from period 1 to period 3 in the previous problem?

When using the GDP deflator, the GDP deflator between the base year and the comparison year is the inflation rate for that period.

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