Economics: GDP Deflator and CPI Calculation

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Questions and Answers

What does the GDP deflator specifically reflect?

Prices for international trade

Prices of goods and services produced domestically (correct)

Average prices of goods globally

Prices of imported goods

How is the CPI for the year 2022 calculated based on the provided CPI basket?

CPI = 100 × ($120/$150)

CPI = 100 × ($150/$120) (correct)

CPI = 100 × ($150/$210)

CPI = 100 × ($210/$120)

Which of the following statements about the CPI is true?

CPI is the same as nominal GDP

CPI can overstate inflation due to substitution effects (correct)

CPI measures only imported goods prices

CPI does not consider consumer substitutions

If the cost of the CPI basket in 2021 was $120, what is the percentage increase in CPI from 2022 to 2023?

40% Signup and view all the answers

What is the nominal interest rate if you deposit $2000 and one year later have $2100?

5% Signup and view all the answers

Which component did not contribute to the CPI calculation in 2022?

Egg prices Signup and view all the answers

What does a CPI of 175 in 2023 indicate in relation to the base year?

Prices are 75% higher than the base year Signup and view all the answers

If the CPI increases from 200 to 204, what is the inflation rate?

2% Signup and view all the answers

What describes the real interest rate?

The interest rate corrected for inflation. Signup and view all the answers

What economic phenomenon does the CPI measure?

Inflation Signup and view all the answers

After one year, if you deposit $1000 in a bank at 10% interest, how much nominal interest do you earn?

$100 Signup and view all the answers

What is true about nominal interest rates?

They are the rates typically advertised by banks. Signup and view all the answers

If $600 in 1980 equates to a certain value today with CPI 300, what would be that value?

$900 Signup and view all the answers

What is the purpose of measuring the overall level of prices in the economy?

To permit comparison between dollar figures from different points in time Signup and view all the answers

What is INDEXATION in the context of inflation?

Automatic correction of a dollar amount for the effects of inflation by law or contract Signup and view all the answers

Which of the following is not a characteristic of the real interest rate?

Usually higher than nominal rates. Signup and view all the answers

In order to compare the historical price of gas from 1957 to 2021, what needs to be done?

Inflate the price of 9.5 cents per litre to 2021 dollars Signup and view all the answers

What would happen to your purchasing power if inflation exceeds the nominal interest rate?

It decreases. Signup and view all the answers

What would a cost-of-living allowance (COLA) do when the CPI rises?

Automatically raise the wage Signup and view all the answers

Which statement is true regarding the GDP deflator?

It can either overstate or understate inflation. Signup and view all the answers

What does the CPI often underestimate?

Inflation rates Signup and view all the answers

What is indicated by a real interest rate?

Interest rates adjusted for inflation Signup and view all the answers

How should the cost of a basket of goods in 1914 be assessed in relation to subsequent years?

It needs to be adjusted for inflation to assess its future cost. Signup and view all the answers

Which of the following statements is an example of a positive economic statement?

Increasing the minimum wage results in more unemployment. Signup and view all the answers

What effect will a rightward shift of the demand curve for housing likely have?

It will lead to an increase in both the price and quantity of homes sold. Signup and view all the answers

If skis and ski boots are complementary goods, what will be the effect of a decrease in the price of skis?

Increased demand for ski boots. Signup and view all the answers

Given Carol's situation, what is the best course of action regarding her old car?

She should sell the car now for $2000. Signup and view all the answers

What happens to real output and prices if nominal GDP remains the same while the GDP deflator increases?

Real output decreases, and prices increase. Signup and view all the answers

Which of the following represents a likely result of a leftward shift of the supply curve for housing?

An increase in home prices and a decrease in the quantity available. Signup and view all the answers

What are some limitations of using the Consumer Price Index (CPI) as a measure of living costs?

It does not account for changes in consumer preferences. Signup and view all the answers

When is a production possibilities frontier said to shift outward?

When new technology is developed. Signup and view all the answers

What does nominal GDP represent?

The total value of all final goods and services produced in an economy at current prices. Signup and view all the answers

How do you calculate the GDP deflator?

Nominal GDP divided by real GDP times 100. Signup and view all the answers

If the CPI was 112.5 in the first year and the annual inflation rates were 2.5%, 1.9%, 2.2%, 2.7%, and 3.1%, what will be the CPI today?

Approximately 127.2 Signup and view all the answers

In the hypothetical economy, what would be considered real GDP?

The GDP adjusted for changes in price level. Signup and view all the answers

What is the primary purpose of calculating the real GDP?

To compare economic performance over time by removing the effects of inflation. Signup and view all the answers

What indicates an increase in the price level, based on the GDP deflator?

A GDP deflator greater than 1. Signup and view all the answers

If your wage increased from $20 to $22 over 5 years with cumulative inflation rates of 2.5%, 1.9%, 2.2%, 2.7%, and 3.1%, what can be inferred about your real earnings?

You earn less in real terms compared to 5 years ago. Signup and view all the answers

Study Notes

The GDP Deflator

The GDP deflator reflects the prices of goods and services produced domestically.
The GDP deflator compares the price of currently produced goods and services to the price of those goods and services in a base year.

Calculate the CPI

CPI basket: 10 kg beef, 20 kg chicken
2021: Cost of CPI basket = $120 (Base Year)
2022: Cost of CPI basket = $150
- CPI in 2022 = 100 × (150/150/150/120) = 125
2023: Cost of CPI basket = $210
- CPI in 2023 = 100 × (210/210/210/120) = 175
- CPI inflation rate 2023 / 2022 = (175 - 125)/125 = 40%

Correcting Economic Variables for the Effects of Inflation

The purpose of measuring the overall level of prices in the economy is to permit comparison between dollar figures from different points in time.
To compare prices from different years, you need to inflate the earlier price to turn earlier dollars into later dollars.

Indexation

Indexation is the automatic correction of a dollar amount for the effects of inflation by law or contract.
A cost-of-living allowance (COLA) automatically raises wages when the CPI increases.

Real and Nominal Interest Rates

Nominal Interest Rate: the interest rate that is usually reported without correction for the effects of inflation.
Real Interest Rate: the interest rate that is corrected for the effects of inflation.
- Real Interest Rate = Nominal Interest Rate - Inflation Rate

Midterm Exam

Covers Chapters 1-6
20 Multiple Choice
5 Short Answer
3 Problems

Examples of Multiple Choice Questions

An economy's gross domestic product (GDP) is the total income and total spending.
Increasing the minimum wage results in more unemployment is a positive statement.
A leftward shift of the demand curve for housing will cause an increase in the price of homes and a decrease in the purchase of homes.
If skis and ski boots are complementary goods, a decrease in the price of skis will lead to increased demand for ski boots.
If Carol spent 2000purchasingandrepairinganoldcar,butneedstospendanadditional2000 purchasing and repairing an old car, but needs to spend an additional 2000purchasingandrepairinganoldcar,butneedstospendanadditional400 for repairs, she should sell the car now for $2000 if she can sell it immediately for that price.

Examples of Short Answer Questions

How can governments improve market outcomes?
What is an efficient outcome on the production possibilities frontier?
When does a production possibilities frontier shift outward?
What does opportunity cost have to do with comparative advantage?
Explain the GDP deflator.
List the three major problems in using the CPI as a measure of the cost of living.
A country reported a nominal GDP of 85billionin2020and85 billion in 2020 and 85billionin2020and100 billion in 2019 and reported a GDP deflator of 100 in 2020 and 105 in 2019. What happened to real output and prices from 2019 to 2020?

Example Problems

Example 1: A hypothetical economy produces only two items: maple syrup and trips to a local tourist attraction, use the data provided to calculate nominal GDP, real GDP, and the GDP deflator.
Example 2: Five years ago, your wage was 20anhour.Nowitis20 an hour. Now it is 20anhour.Nowitis22. The inflation rates for the past 5 years are: 2.5, 1.9, 2.2, 2.7, and 3.1 percent. (a) In real terms, do you now earn more or less than 5 years ago? (b) How much was the inflation rate over the 5-year period? (c) If the CPI was 112.5 in the first year, how much is it today?
Example 3: (a) Given the table, graph the demand and supply curves for flashlights. Ensure to label equilibrium price and equilibrium quantity. (b) What is the equilibrium price and equilibrium quantity? (c) Suppose the price is currently at $5.

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Description

This quiz covers key concepts related to the GDP deflator and Consumer Price Index (CPI) calculations. You will learn how to measure inflation and compare economic variables over time. Test your understanding of indexation and its impact on economic analysis.