Question

The beautiful country of Dilly-Dally produces only 2 goods, as shown below: Dillys 2020: Price $5, Quantity (millions) 80 Dillys 2021: Price $8 ,Quantity (millions) 85 Dallys 2020: Price $6, Quantity (millions) 100 Dallys 2021: Price $6 ,Quantity (millions) 120 Assume that the average Dilly-Dallyan’s consumption basket consists of 200 Dillys and 180 Dallys per year, and that 2020 is the base year. a. (1.5 points) Calculate Nominal GDP, Real GDP and GDP deflator for both 2020 and 2021. b. (1.5 points) Calculate the CPI for Dilly-Dallyans in the years of 2020 and 2021. c. (1 point) Using the GDP deflator, calculate the inflation in Dilly-Dally in 2021. d. (1 point) Is the consumer’s inflation for 2021 in Dilly-Dally the same as in part c ? Explain.

Answer 1

The Nominal GDP for 2020 is $1,000 million and for 2021 is $1,400 million. The Real GDP for 2020 is $1,000 million and for 2021 is $1,145 million. The GDP deflator for 2020 is 100 and for 2021 is 122. The CPI for Dilly-Dallyans in 2020 is 100 and in 2021 is 108. The inflation in Dilly-Dally in 2021 is 22%. The consumer's inflation for 2021 in Dilly-Dally is not the same as the inflation calculated using the GDP deflator.

Step-by-step explanation:

To calculate the Nominal GDP, we multiply the price of each good by its corresponding quantity and sum them up. In 2020, the Nominal GDP would be 80 million Dillys × $5 per Dilly + 100 million Dallys × $6 per Dally = $400 million + $600 million = $1,000 million. In 2021, the Nominal GDP would be 85 million Dillys × $8 per Dilly + 120 million Dallys × $6 per Dally = $680 million + $720 million = $1,400 million.

To calculate the Real GDP, we use the base year's prices and multiply them by the current year's quantities. In 2020, the Real GDP would be 80 million Dillys × $5 per Dilly (base year price) + 100 million Dallys × $6 per Dally (base year price) = $400 million + $600 million = $1,000 million. In 2021, the Real GDP would be 85 million Dillys × $5 per Dilly (base year price) + 120 million Dallys × $6 per Dally (base year price) = $425 million + $720 million = $1,145 million.

To calculate the GDP deflator, we divide the Nominal GDP by the Real GDP and multiply by 100. In 2020, the GDP deflator would be ($1,000 million / $1,000 million) × 100 = 100. In 2021, the GDP deflator would be ($1,400 million / $1,145 million) × 100 = 122.

The CPI (Consumer Price Index) calculates the average price change across all goods and services consumed by the average person. In 2020, the CPI for Dilly-Dallyans would be [($5 per Dilly × 200 Dillys) + ($6 per Dally × 180 Dallys)] / [($5 per Dilly (base year price) × 200 Dillys (base year quantity)) + ($6 per Dally (base year price) × 180 Dallys (base year quantity))] × 100 = (100 + 100) / (100 + 100) × 100 = 100. In 2021, the CPI would be [($8 per Dilly × 200 Dillys) + ($6 per Dally × 180 Dallys)] / [($5 per Dilly (base year price) × 200 Dillys (base year quantity)) + ($6 per Dally (base year price) × 180 Dallys (base year quantity))] × 100 = (108 + 100) / (100 + 100) × 100 = 108.

Using the GDP deflator, we can calculate the inflation rate as the percentage change in the GDP deflator from one year to another. In 2021, the inflation in Dilly-Dally would be [(122 - 100) / 100] × 100 = 22%.

No, the consumer's inflation for 2021 in Dilly-Dally is not the same as the inflation calculated using the GDP deflator. The CPI measures the price change based on the consumption basket of the average person, while the GDP deflator measures the price change of all goods and services produced within the country. Therefore, they may not always yield the same inflation rate.