Question

A small nation of 10 people idolizes the TV show The Voice. All they produce and consume are karaoke machines and CDs, in the following amounts: Karaoke Machines CDs Quantity Price Quantity Price (Dollars) (Dollars) 2020 20 50 60 5 2021 21 70 80 6 Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is . (Note: Use 2020 as the base year, and fix the basket at 2 karaoke machines and 6 CDs.) Using a method similar to that used to calculate the GDP deflator, the percentage change of the overall price level is . (Note: Again, use 2020 as the base year.) Which of the following statements is correct

Answer 1

1. Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is;

Value of market basket of the good in 2020

= (50 * 2) + (5 * 6)

= $130

Value of market basket of the good in 2021

= (70 * 2) + (6 * 6)

= $176

CPI in 2020

= 130/ 130 * 100

= 100

CPI in 2021

= 176 / 130 * 100

= 135.38

Percentage change

= (135.38 - 100)/100

= 35.38%.

2. Using a method similar to that used to calculate the GDP deflator, the percentage change of the overall price level is ;

Nominal GDP in 2020 = (50 * 20) + (5 * 60) = $1,300

Nominal GDP in 2021 = (70 * 21) + (6 * 80) = $1,950

Real GDP using 2020 prices

Real GDP in 2020 = (50 * 20) + (5 * 60) = $1,300

Real GDP in 2021 = (50 * 21) + (5 * 80) = $1,450

GDP deflator in 2020 = (Nominal GDP in 2020 / Real GDP in 2020) * 100 = (1,300 / 1,300) * 100 = 100

GDP deflator in 2021 = (Nominal GDP in 2021 / Real GDP in 2021) * 100 = (1,950 / 1,450) * 100 = 134.48

Percentage Change = [(134.48 - 100) / 100] * 100

= 34.48%