Consider an economy with three goods: Computers, Legos, and Beanie Babies. The following table shows the quantities produced and prices for two years, 2002 and 2005. 2002 2005 Good Quantity Price Quantity Price Computers 5 100 15 110 Legos 10 50 15 50 Beanie Babies 10 50 5 75 a. Assume that 2002 is the base year. Construct a Laspyres Index for the price level in 2005. b. Similarly, construct a Paasche Index for the price level in 2005. c. Lastly, construct a Fisher Index for the price level in 2005. d. Calculate the implied inflation rates using each of the three price indices you've developed. Compare and contrast the implications for the measurement of inflation and for the measurement of changes in this economy's economic activity (i.e. it's "GDP").

Consider an economy with three goods: Computers, Legos, and Beanie Babies. The following table shows the quantities produced and prices for two years, 2002 and 2005. 2002 2005 Good Quantity Price Quantity Price Computers 5 100 15 110 Legos 10 50 15 50 Beanie Babies 10 50 5 75 a. Assume that 2002 is the base year. Construct a Laspyres Index for the price level in 2005. b. Similarly, construct a Paasche Index for the price level in 2005. c. Lastly, construct a Fisher Index for the price level in 2005. d. Calculate the implied inflation rates using each of the three price indices you've developed. Compare and contrast the implications for the measurement of inflation and for the measurement of changes in this economy's economic activity (i.e. it's "GDP").

Macroeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506756

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter7: Taking The Nation's Economic Pulse

Section: Chapter Questions

Problem 6CQ

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