Explain how much have prices risen among year

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Reference no: EM13113157

Q. Consider an economy that produces and consumes bread and automobiles. In the subsequent table are data for two different years.

Year Year
2000 2010
Price of an automobile $50,000 $60,000
Price of a loaf of bread $10 $20
Number of automobiles produced 100 120
Number of loaves of bread produced 500,000 400,000

a. Using the year 2000 as the base year, compute the subsequent statistics for each year: nominal GDP, real GDP the implicit price deflator for GDP and a fixed-weight price index such as the CPI.

b. Explain how much have prices risen among year 2000 and year 2010? Compare the answers given by the Laspeyres and Paasche price indices. Explain the difference.

c. Suppose you are a senator writing a bill to index Social Security and federal pensions. That is, your bill will adjust these benefits to offset changes in the cost of living. Will you use the GDP deflator or the CPI? Explain why?

Reference no: EM13113157

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