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This would lower my estimation of the inflation rate because the value of a bottle of
Gatorade is now greater than before. The comparison should be made on a per-ounce
basis.
d. More flavors enhance consumers well-being. Thus, this would be considered a change in
quality and would also lower my estimate of the inflation rate.
3. a. Find the price of each good in each year:
Year
2008
2009
Cauliflower
$2
$3
Broccoli
$1.50
$1.50
Carrots
$0.10
$0.20
b. If 2008 is the base year, the market basket used to compute the CPI is 100 heads of
cauliflower, 50 bunches of broccoli, and 500 carrots. We must now calculate the cost of
the market basket in each year:
2008: (100 x $2) + (50 x $1.50) + (500 x $.10) = $325
2009: (100 x $3) + (50 x $1.50) + (500 x $.20) = $475
Then, using 2008 as the base year, we can compute the CPI in each year:
2008: $325/$325 x 100 = 100
2009: $475/$325 x 100 = 146
c.
We can use the CPI to compute the inflation rate for 2009:
(146 100)/100 x 100% = 46%
4. a. The cost of the market basket in 2009 is (1 $40) + (3 $10) = $40 + $30 = $70.
The cost of the market basket in 2010 is (1 $60) + (3 $12) = $60 + $36 = $96.
Using 2009 as the base year, we can compute the CPI in each year:
2009: $70/$70 x 100 = 100
20109: $96/$70 x 100 = 137.14
We can use the CPI to compute the inflation rate for 2010:
(137.14 100)/100 x 100% = 37.14%
b. Nominal GDP for 2009 = (10 $40) + (30 $10) = $400 + $300 = $700.
Nominal GDP for 2010 = (12 $60) + (50 $12) = $720 + $600 = $1,320.
Real GDP for 2009 = (10 $40) + (30 $10) = $400 + $300 = $700.
Real GDP for 2010 = (12 $40) + (50 $10) = $480 + $500 = $980.
The GDP deflator for 2009 = (700/700) 100 = 100.
The GDP deflator for 2010 = (1,320/980) 100 = 134.69.
The rate of inflation for 2010 = (134.69 100)/100 100% = 34.69%.
No, it is not the same. The rate of inflation calculated by the CPI holds the basket of
goods and services constant, while the GDP deflator allows it to change.
5. a. Because the increase in cost was considered a quality improvement, there was no
increase registered in the CPI.
b. The argument in favor of this is that consumers are getting a better good than before, so
the price increase equals the improvement in quality. The problem is that the increased
cost might exceed the value of the improvement in air quality, so consumers are worse
off. In this case, it would be better for the CPI to at least partially reflect the higher cost.
6. a. introduction of new goods; b. unmeasured quality change; c. substitution bias; d.
unmeasured quality change; e. substitution bias
7. a. ($0.75 $0.15)/$0.15 x 100% = 400%.
b. ($14.32 $3.23)/$3.23 x 100% = 343%.
c.
Homeowners in the 1970s who had fixed-rate mortgages from the 1960s benefited from
the unexpected inflation, while the banks that made the mortgage loans were harmed.
This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be
resold, copied, or distributed without the prior consent of the publisher.