Question

Use the information to calculate the GDP deflator for both years and the inflation rate. The base year is 1970. Assume that there are only three goods in the economy: eggs, calculators, and microwave ovens.
Please round your answer to two decimal points.

Market basket 1970 prices 1975 quantity 1975 prices 1976 quantity 1976 prices
dozen eggs 0.10 21 0.50 25 0.90
calculator 15.00 11 10.50 17 14.50
microwave 70.00 1 130.00 5 150.00What is GDP deflator for 1975?

Answer 1

Answer: 107.97

Explanation:

Nominal GDP for 1975 = 1975 quantity × 1975 prices

                                     = (21 × 0.50) +  ( 11 × 10.5 ) + ( 1 × 130 )

                                     = 10.5 + 115.5 + 130

                                     = 256.0

Real GDP for 1975 = 1975 quantity × 1970 prices

                               = (21 × 0.10) +  ( 11 × 15 ) + ( 1 × 70 )

                               = 237.1

$GDP\ delator=\frac{Nominal\ GDP}{Real\ GDP}\times100$

$GDP\ delator=\frac{256.0}{237.1}\times100$

                            = 1.079 × 100

                            = 107.97