Question

Suppose that people consume only three goods, as shown in this table (5+5+5+=15)

Tennis Balls Golf Balls Cars

2016-P rice 2 1 4

2016-Quantity 100 200 100

2017-Price 2 2 6

2017-Quantity 100 200 100

(a)Calculate the percentage change in the price of each of the three goods. Using a method similar to the

consumer price index, compute the percentage change in the overall price level.

(b)Discuss the three problems that make consumer price index an imperfect measure of the cost of living.

(c)Compare consumer price index and GDP deflator, what do you think which measure of cost of living is the

best? Why​

Answer 1

Answer:

We know that consumer price index means that change in the price level of a market basket of consumer goods and services purchases by a household. In this question given the price and quantity of three goods. Then percentage change is:

Tennis balls =2−2/2∗100=0 %

Tennis balls =2−2/2∗100=0 % Golf balls =6−4/4∗100=50 %

Bottles of gatorade =2−1/1∗100=100 %

Now we calculate the cost of basket in each year:

In 2014 =($2∗100)+($4∗100)+($1∗100)=200+400+100=$700 In 2015 =($2∗100)+($6∗100)+($2∗100)=200+600+200=$1000

Now the percentage chage in cost of basket is

=1000−700/1000∗100=30 %

Answer 2

Answer:

a)  The percentage change in the price of each product,

Tennis Balls-0%

Golf Balls-100%

Cars-50%

The percentage change in the cost of the basket is=20 %

(b) The measurement defined as the "consumer price index," or CPI for short, measures the weighted average cost of a basket of goods or services. By averaging the changes in the price of a specific good across a preset limited assortment of goods, the consumer price index is computed. When it relates to determining phases of deflation and inflation, the consumer price index is crucial.

(c) While the Gross Domestic Product (GDP) deflator provides variable weights to the prices of various categories, the CPI or RPI assigns stable weights. In other words, the GDP deflator permits the basket of products to change over time as the composition of GDP varies, whereas the CPI or RPI evaluates that used a static basket of products.

Explanation:

a) Percentage change$=\frac{(current value-previous value)}{previous value} 100$

Tennis balls  $=\frac{2-2}{2} X100$

=0%

Golf balls  $=\frac{2-1}{1} X100$

=100%

Cars $=\frac{6-4}{4}X100$

=50%

Now we calculate the cost of the basket each year:

In 2016=($2100)+($1200)+($4100)

=200+200+400

=$800

In 2017 =($2100)+($2200)+($6100)

=200+200+600

=$1000

Now the percentage change in the cost of the basket is,

$=\frac{1000-800}{1000}X100$

=20 %

(b) When used to gauge how much it costs to live in an economy, the consumer price index has a number of issues. First off, the consumer index favors interchangeable goods. While consumer costs rise, consumers frequently choose to purchase goods that can be replaced. The consumer pricing index, however, makes no mention of modifications in consumer behavior. Instead of concentrating on the substitute items that the consumer is consuming, it moves forward assuming that they continue to use the products.

(c) Inflation is measured using the GDP deflator, frequently alluded to as the implicit price deflator. It is employed to assess the annual valuations of recently founded final goods and services in a nation.

The GDP price deflator has an advantage over the CPI as GDP isn't based on a predetermined basket of goods and services. In contrast, whereas the CPI does not instantly accommodate shifts in consumer tendencies or the advent of new goods and services, the deflator seems to do.

To know more about the consumer price index, visit:

https://brainly.com/question/19245789

To know more about the Gross Domestic Product, visit:

https://brainly.com/question/15682765

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