Question

Boulderland has two goods that people buy: Climbing Harnesses and pairs of Skis. In year 1, 100 harnesses are sold at a price of $2 each while 50 pairs of skis are sold at $2. In year 2, 106 harnesses and 54 skis are sold, with harnesses being sold at $2.05 and skis being sold at $1.80. What is the chain-weighted real expenditure of goods sold in Boulderland in year 2?

Answer 1

Nominal Expenditure in Year 1=100*2+50*2=$300

It is equal to real expenditure in year 1 assuming year 1 as base year.

Consmption in year 1 at year 1 prices=$300

Consmption in year 2 at year 1 prices=106*2+54*2=$320

Growth rate at year 1 prices=(320-300)/300=6.6667%

Now let us calculate the consumption at year 2 prices

Consmption in year 1 at year 2 prices=100*2.05+50*1.80=$295

Consmption in year 2 at year 1 prices=106*2.05+54*1.80=$314.50

Growth rate at year 2 prices=(314.5-295)/295=6.6102%

Average Growth rate=(6.6667%+6.6102%)/2=6.6385%

Chain weighted real expenditure in year 2=300+300*6.6385%=$319.92

Step-by-step explanation: