Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN: 9781305506725
Author: James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher: Cengage Learning
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Chapter 7, Problem 10CQ
To determine
Identify the difference in the
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Define the term consumer price index (CPI)?
Suppose you are a senior public servant writing a bill to index Social
Security and pensions. That is your bill will adjust these benefits to
offset changes in the cost of living. Will you use the GDP deflator or
the CPI? Explain
The island nation of Coronia subsists entirely on pancakes and syrup. That is, they produce and consume only pancakes and syrup in the following amounts:
Pancake Mix (cases)
Maple Syrup (gallons)
Quantity
Price
Quantity
Price
2019
16
5
8
30
2020
48
6
10
50
(a) Using a method like the CPI, compute the CPI in 2019 and 2020 and percentage change in the overall price level from 2019 to 2020 (inflation rate). Use 2019 as the base year and fix the market basket at 4 pancakes and 2 syrups.
(b) Using a method like the GDP deflator, compute the GDP deflator in 2019 and 2020 and percentage change in the overall price level from 2019 to 2020 (inflation rate). Use 2019 as the base year.
(c) Is there a difference in the inflation rate using the two methods? Explain why or why not.
Chapter 7 Solutions
Economics: Private and Public Choice (MindTap Course List)
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- If only cars and bikes are sold in a country and the consumer price index(CPI) has exceeded the GDP deflator what does this mean for the prices of the cars and the bike? they remain the same? Do they change differently? how does the GDP deflator supposed to move with CPI?arrow_forwardWhat is the difference between using a measure of inflation such as the consumer prices index (CPI) and the GDP deflator? Which do you think is the more accurate measure of price changes in an economy?arrow_forwardThe GDP deflator for this year is calculated by dividing the using by the using and multiplying by 100. However, the CPI reflects only the prices of all goods and servicesarrow_forward
- Examine the following information as reported for the foods below in the years 2010 and 2019. 2010 2019 Item Price (S) Quantity Price (S) Quantity Eggs (one dozen) $2.75 27 $3.37 40 Chicken (500 g) $3.20 11 $3.57 7 Bread (675 g) $2.28 18 $2.83 23 a) Compute a simple price index for each of the items, using the year 2010 as the base year. Enter them in the same order as above: Eggs, Chicken, Bread. Round answers to 1 decimal. b) Compute a simple aggregate price index. Use 2010 as the base period. Round to one decimal place. c) Compute the Laspeyres price index for 2019 using 2010 as the base year. Round to one decimal place. d) Determine a value index for 2019, using 2010 as the base year. Round to one decimal place.arrow_forwardUsing the GDP Deflator calculate the average annual inflation rate that the U.S. experienced over the period beginning with the year of 1998 and ending with 2020. (Note: you do not use the inflation rate as the data you plug into the formula. Rather, you calculate an inflation rate by using the formula.) GDP Deflator: price index in 1998 is 75.3, in 2020 is 113.6 inflation rate in 1998 is 1.1, in 2020 is 1.2 nominal interest rates in 1998 is 6.53, in 2020 is 2.48 Real interest rates in 1998 is 5.41, in 2020 is 1.27arrow_forwardIn each scenario, determine the effects on the CPI and the GDP deflator. A local manufacturer raises the price of the industrial tractors it produces.arrow_forward
- Use your CPI Chart to calculate the numbers 2-4. 2. If you made $38,000 in 1997, how much money would you have to make in 2006 to maintain your real income? Explain.arrow_forwardThe table below shows some data I got from FRED on the CPI and PCE deflator. The PCE deflator is a price index similar to the GDP deflator but only uses the consumption ("personal consumption expenditures") part of the GDP data. Year CPI PCE deflator 1989 123.94 60.69 2001 177.04 79.74 2020 258.84 111.15 You were probably born around 2001 so calculate the annualized inflation rate based on the CPI between 2001 and 2020. Repeat to find the annualized inflation using the PCE deflator between 2001 and 2020. The gives a higher inflation rate O PCE, and its noticeably higher (over 0.5 percentage points) PCE, but its not that different from the CPI inflation rate (difference is under 0.5 percentage points) CPI, and its noticeably higher (over 0.5 percentage points) CPI, but its not that different from the CPI inflation rate (difference is under 0.5 percentage points)arrow_forwardDoes an increase in the price of imported Belgian chocolate affect the CPI or the GDP deflator more? Whyarrow_forward
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