
Subpart (a):
Measuring percentage change in
Subpart (a):

Explanation of Solution
Cost of market for the basket can be calculated by using the following formula.
Substitute the respective values in Equation (2) to calculate the cost of market basket in the year 2014:
Cost of market basket for the year 2014 is $70.
Substitute the respective values in Equation (2) to calculate the cost of market basket in the year 2015:
Cost of market basket for the year 2015 is $96.
CPI can be calculated by using the following formula:
Substitute the respective values in Equation (2) to calculate the CPI in the year 2014:
CPI in the year 2014 is 100.
Substitute the respective values in Equation (2) to calculate the CPI in the year 2015:
CPI in the year 2015 is 137.14.
The overall change in price using CPI is calculated as follows:
Thus the overall change in price is 37.14% which is the inflation rate for 2015 computed using CPI. Thus the inflation rate for 2015 is 37.14%.
Concept Introduction:
Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services for the present time from the base year.
Inflation rate: Inflation rate refers to the rate of change in the price level.
GDP deflator: Gross Domestic Product (GDP) deflator is the measure of inflation.
Real GDP: Real GDP refers to the market value of all final goods and services produced in an economy during an accounting year, and measured in constant prices.
Nominal GDP: Nominal GDP refers to the market value of all final goods and services produced in an economy during an accounting year, measured in current prices.
Subpart (b):
Measuring percentage change in price using CPI and GDP deflator.
Subpart (b):

Explanation of Solution
The Nominal GDP can be calculated by using the following formula:
Substitute the respective values in Equation (3) to calculate the nominal GDP in the year 2014:
Nominal GDP in the year 2014 is $700.
Substitute the respective values in Equation (3) to calculate the nominal GDP in the year 2015:
Nominal GDP in the year 2015 is $1,320.
The real GDP can be calculated by using the following formula:
Substitute the respective values in Equation (4) to calculate the real GDP in the year 2014:
Real GDP in the year 2014 is $700.
Substitute the respective values in Equation (4) to calculate the real GDP in the year 2015:
Real GDP in the year 2015 is $980.
GDP deflator can be calculated by using the following formula:
Substitute the respective values in equation (5) to calculate the GDP deflator in year 2014:
GDP deflator in the year 2014 is 100.
Substitute the respective values in equation (5) to calculate the GDP deflator in year 2015:
GDP deflator in the year 2015 is 134.69.
Using 2014 as base year, the GDP deflator for 2014 is calculated as 100 and for 2015 is 134.69.
The overall change in price using CPI is calculated as follows:
Thus the inflation rate for 2015 computed using GDP inflator is 34.69%.
Concept Introduction:
Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services for the present time from the base year.
Inflation rate: Inflation rate refers to the rate of change in the price level.
GDP deflator: Gross Domestic Product (GDP) deflator is the measure of inflation.
Real GDP: Real GDP refers to the market value of all final goods and services produced in an economy during an accounting year, and measured in constant prices.
Nominal GDP: Nominal GDP refers to the market value of all final goods and services produced in an economy during an accounting year, measured in current prices.
Subpart (c):
Measuring percentage change in price using CPI and GDP deflator.
Subpart (c):

Explanation of Solution
No, the inflation rate is not the same. It is calculated as 37.14% using CPI whereas it is found to be 34.69% when computed using GDP deflator. This is because, the rate of inflation computed by the CPI holds the basket of goods and services constant; and on the other hand, the GDP deflator allows it to change and holds the prices constant.
Concept Introduction:
Consumer Price index (CPI): It is a measure that examines the changes in price levels of a basket of consumer goods and services for the present time from the base year.
Inflation rate: Inflation rate refers to the rate of change in the price level.
GDP deflator: Gross Domestic Product (GDP) deflator is the measure of inflation.
Real GDP: Real GDP refers to the market value of all final goods and services produced in an economy during an accounting year, and measured in constant prices.
Nominal GDP: Nominal GDP refers to the market value of all final goods and services produced in an economy during an accounting year, measured in current prices.
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Chapter 16 Solutions
Essentials of Economics (MindTap Course List)
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