Michigan State University

• ECON 402

• Prof. Ed Cho Econ 402 Problem Set 1 Solutions Cars and Sled Dogs Year Cars Dogs Nom GDP Real GDP GDP deflator Inflation (deflator) CPI Inflation (CPI) PA QA PD QD - - - - - - 2000 (base) 10 50 - - 500 500 500/500 = 1.00 - 500/500 = 1.00 - 2001 10 60 - - 600 600 1.00 0% 500/500 = 1.00 0% 2002 15 60 - - 900 600 1.50 50% 750/500 = 1.50 50% 2003 15 0 10 80 800 800 1.00 -33.3% 750/500 = 1.50 0% 1. The Bureau of Labor Statistics has collected the following information about prices and quantities, for a snowy economy that only produces cars from 2000 to 2002. a. Fill in the missing entries in the table above for 2001 and 2002. Explain intuitively any changes in real GDP and both price indices for 2001 and 2002. In 2001, prices stayed the same (relative to 2000) so that inflation is zero as measured by both the deflator and CPI. Real GDP increases from 500 to 600, because the quantity of cars produce/consumed increased. In 2002, the output of cars is constant at 60, but the price level goes from 10 to 15. Therefore, in 2002, real GDP does not change (relative to 2001