(a)
(i) 2011
(2 x 20) + (10 x 15) + (1.20 x 10) + (1.60 x 5) + (5 x 10) = $260
(ii) 2012
(2.20 x 20) + (12 x 15) + (1.50 x 10) + (3.20 x 5) + (5 x 10) = $305
(b) From your results in (a), calculate the percentage change in the cost of living in Ruritania from 2011 to 2012.
Rate of Change Formula = (New – Old) / Old x 100
(305 – 260) / 260 x 100 = 17.307 or 17.31
Or
Rate of Change Formula = (New/Old -1) x100
(305/260 – 1) x 100 = 17.307 or 17.31
(ii) Calculate the Rate of Inflation between 2010 and 2011.
Rate of Change Formula = (New-Old) / Old x 100
2009 to 2010 Rate of Change = (1470 – 1355) / 1355 x 100 = 8.49% so, the Inflation Rate from 2009 (Base Year) to 2010 is 8.49% or the CPI for 2010 is 108.49
2010 to 2011 Rate of Change – (1705 – 1470) / 1470 x 100 = 15.98%, so the inflation rate from 2010 to 2011 is 15.98%, the CPI for 2011 is 25.83%
(ii) With reference to the terms inflation and disinflation, describe the changes in the cost of living during the period 2009 to 2012.
Inflation = a rise in prices of goods and services (increase in the APL).
Disinflation = a slow in the rate of increase of inflation.
From 2009 to 2012 prices are rising (Inflation)
From 2011 to 2012 prices are rising but the rate of increase is slowing. (Disinflation)
(d) Explain 2 problems which economists face when using a CPI to measure the rate of inflation.
· Different income earners may experience a different rate of inflation as their consumption patterns differ and so the CPI may not accurately represent their cost of living.
· CPI figures may not accurately reflect consumption patterns as these change over time, as does the quality of products purchased.
· There may be wide regional differences in prices, so the CPI may not accurately reflect the cost of the basket of goods in all parts of the country.
· Substitution Bias,
· Quality Bias
(e) The GDP in 2009 was 60b Yen, while in 2010 it was 65b Yen.
Calculate the percentage change in the real GDP from 2009 to 2010.
The Rate of Inflation from 2009 to 2010 was 14%.
Real GDP 2010 = Nominal GDP/Deflator x 100 = 57.02b Yen
Real GDP 2009 = Nominal = Real in the base year = 60b Yen
Rate of Change in RGDP = (New-Old) / Old x 100
(57.02 – 60) / 60 x 100 = 4.966% or 4.97%
(f) When calculating inflation for the purpose of policy-making, economists might calculate a core/underlying rate of inflation. Explain why they might do this.
Large & sudden changes in the price of one or two products (or product groups) may distort the measured rate of inflation. In order to focus on the general price trend, the government may calculate a core/underlying rate of inflation, which excludes products or product groups with highly volatile prices, such as energy and food, on which to base economic policy.
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