Homework Question 7: The Caviar Price Index Belugaland is an economy that produces only 3 goods: spear guns, caviar and fish fillets. The prices and quantities of goods in Belugaland are provided in the table below. In case you did not know already, caviar and fish fillets are consumer goods that are produced by killing fish. Spear guns are used by fishermen in Belugaland to shoot and kill fish. Assume there are no other goods or services produced in the economy. Also assume there are no imports or exports. Year Price Quantity Year Price Quantity $125 2020 $100 2020 $5 2020 $50 Good Pounds of Caviar Fish Fillets Spear Guns 20 400 20 2022 2022 $5 2022 20 440 $100 10 a) Calculate nominal GDP. real GDP, the GDP deflator and the PCE deflator for 2020 and 2022, using 2020 as the base year. b) Suppose that the CPI was first set up in 2020 (i.e. the reference year was 2020). What goods would be chosen for the CPI basket, and in what quantities? Briefly explain how you came about your answer. c) Using this basket, calculate the value of the CPI in 2020 and in 2022. d) Calculate three different measures of the average annual rate of inflation between 2020 and 2022 using the GDP deflator, the PCE deflator and the CPI respectively. e) Provide some intuition for why they are different from one another in this specific example.
Homework Question 7: The Caviar Price Index Belugaland is an economy that produces only 3 goods: spear guns, caviar and fish fillets. The prices and quantities of goods in Belugaland are provided in the table below. In case you did not know already, caviar and fish fillets are consumer goods that are produced by killing fish. Spear guns are used by fishermen in Belugaland to shoot and kill fish. Assume there are no other goods or services produced in the economy. Also assume there are no imports or exports. Year Price Quantity Year Price Quantity $125 2020 $100 2020 $5 2020 $50 Good Pounds of Caviar Fish Fillets Spear Guns 20 400 20 2022 2022 $5 2022 20 440 $100 10 a) Calculate nominal GDP. real GDP, the GDP deflator and the PCE deflator for 2020 and 2022, using 2020 as the base year. b) Suppose that the CPI was first set up in 2020 (i.e. the reference year was 2020). What goods would be chosen for the CPI basket, and in what quantities? Briefly explain how you came about your answer. c) Using this basket, calculate the value of the CPI in 2020 and in 2022. d) Calculate three different measures of the average annual rate of inflation between 2020 and 2022 using the GDP deflator, the PCE deflator and the CPI respectively. e) Provide some intuition for why they are different from one another in this specific example.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Homework Question 7: The Caviar Price Index
Belugaland is an economy that produces only 3 goods: spear guns, caviar and fish fillets.
The prices and quantities of goods in Belugaland are provided in the table below. In case you did
not know already, caviar and fish fillets are consumer goods that are produced by killing fish. Spear
guns are used by fishermen in Belugaland to shoot and kill fish. Assume there are no other goods
or services produced in the economy. Also assume there are no imports or exports.
Year Price
Quantity Year Price Quantity
$100
2020
2020 $5
2020 $50 20
Good
Pounds of Caviar
Fish Fillets
Spear Guns
20
400
2022 $125
20
2022 $5
440
2022 $100 10
a) Calculate nominal GDP, real GDP, the GDP deflator and the PCE deflator for 2020 and
2022, using 2020 as the base year.
b) Suppose that the CPI was first set up in 2020 (i.e. the reference year was 2020). What goods
would be chosen for the CPI basket, and in what quantities? Briefly explain how you came
about your answer.
c) Using this basket, calculate the value of the CPI in 2020 and in 2022.
d) Calculate three different measures of the average annual rate of inflation between 2020 and
2022 using the GDP deflator, the PCE deflator and the CPI respectively,
e) Provide some intuition for why they are different from one another in this specific example.
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