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Suppose a country produces two final goods, Pizzas (Ps) and Tacos (Ts). In Year 1 it produced 10...

Question:

Suppose a country produces two final goods, Pizzas (Ps) and Tacos (Ts). In Year 1 it produced 10 Ps at a price of $5 each and 50 Ts at a price of $1 each. In Year 2 it produced 15 Ps at a price of $6 and 50 Ts at a price of $2. If Year 1 is the base year, the inflation rate in the GDP deflator between Years 1 and 2 is 52%. Is this true or false? Why?

GDP Deflator:

In economics, GDP deflator measures the changes in aggregate price levels in an economy. For a given year, the GDP deflator is calcualted as the the ratio of nominal GDP to real GDP.

Answer and Explanation:

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The statement is true.

GDP deflator = (nominal GDP / real GDP) * 100

Nominal GDP in year 2 = 15*6 + 50*2 = 90 + 100 = 190. Using year 1 as the base...

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The GDP Deflator and Consumer Price Index

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Chapter 5 / Lesson 2
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Have you ever wondered how inflation is measured? This lesson will compare and contrast two of the indicators used to measure inflation - the consumer price index and the GDP deflator.


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