A small nation of ten people idolizes the TV show Canadian...

A small nation of ten people idolizes the TV show Canadian Idol. All that the ten people produce and consume are karaoke machines and $\mathrm{CDs}$, in the following amounts: $$\begin{array}{|c|c|c|c|c|} \hline \multirow{2}{*} {} & \multicolumn{2}{|c|} {\text { Karaoke Machines }} & \multicolumn{2}{|c|} {\text { CDs }} \\ \)\cline { 2 - 5 } & \( \text { Quantity } & \text { Price } & \text { Quantity } & \text { Price } \\ \hline 2014 & 10 & \$ 40 & 30 & \$ 10 \\ \hline 2015 & 12 & 60 & 50 & 12 \\ \hline \end{array}$$ a. Using a method similar to the consumer price index, compute the percentage change in the overall price level. Use 2014 as the base year, and fix the basket at 1 karaoke machine and 3 CDs. b. Using a method similar to the GDP deflator, compute the percentage change of the overall price level. Also use 2014 as the base year. c. Is the inflation rate in 2015 the same using the two methods? Explain why or why not.

A small nation of ten people idolizes the TV show Canadian Idol. All that the ten people produce and consume are karaoke machines and $\mathrm{CDs}$, in the following amounts:
$$\begin{array}{|c|c|c|c|c|}
\hline \multirow{2}{*} {} & \multicolumn{2}{|c|} {\text { Karaoke Machines }} & \multicolumn{2}{|c|} {\text { CDs }} \\
\)\cline { 2 - 5 } & \( \text { Quantity } & \text { Price } & \text { Quantity } & \text { Price } \\
\hline 2014 & 10 & \$ 40 & 30 & \$ 10 \\
\hline 2015 & 12 & 60 & 50 & 12 \\
\hline
\end{array}$$
a. Using a method similar to the consumer price index, compute the percentage change in the overall price level. Use 2014 as the base year, and fix the basket at 1 karaoke machine and 3 CDs.
b. Using a method similar to the GDP deflator, compute the percentage change of the overall price level. Also use 2014 as the base year.
c. Is the inflation rate in 2015 the same using the two methods? Explain why or why not.

Key Concepts

Consumer Price Index (CPI)

The Consumer Price Index is a measure that tracks the cost of a fixed basket of goods and services over time. It represents how much it would cost to purchase a specified bundle of items in different periods, allowing for comparisons of price changes (inflation or deflation) between a base year and subsequent years.

Fixed Basket Approach

This approach involves selecting a set of goods and services (the basket) based on their proportions in consumer spending during a base period. Prices are then tracked over different periods using the basket's fixed quantities, thereby isolating the effect of price changes from changes in consumption patterns.

GDP Deflator

The GDP deflator is an index that measures the change in prices for all goods and services produced within an economy. Unlike the CPI, it weighs items according to their current production levels, reflecting changes in both price and economic composition over time.

Inflation Rate

The inflation rate represents the percentage change in the overall price level of goods and services in an economy over a period of time. It is measured by comparing the cost of a specified set of items (in the CPI) or the overall price level (in the GDP deflator) between different time periods.

Differences Between CPI and GDP Deflator

The CPI and GDP deflator differ primarily in their baskets and weighting methods. The CPI uses a fixed basket based on a base period's consumption pattern, while the GDP deflator reflects the current production mix of an economy. These differences can lead to varying inflation rates as each method captures price changes in different parts of the economy.

Transcript

00:01 So a small nation of 10 people idealizes the tv show canadian idol and all the 10 people produce and consumes are karaoke machines and cities.

00:11 So the number of people attend and all they consume is karaoke machines and cds.

00:25 So we're going to let karaoke machines be k and cities be c .c.

00:30 So we don't get it confused.

00:32 And we are giving a table that shows the quantity of my...

00:36 Machines they consume and the price and the quantity of cd they consume and the price.

00:41 So the first question says using a method similar to the consumer price index which is cpi compute the percentage changing overall price level and use 2014 as the base year because we have 2014 and 2015 and fix the basket at one karaoke and three cds.

01:00 So to have one karaoke and three cds.

01:04 Now to start that, percentage change in overall price level and we had to use a metal similar to the cbi so for 2014 the um for 2014 the cpi will be 400 will be 40 because they are because the price of cities for 2014 is 40 then what to use one karaoke and three cities so one multiplied by one plus the price of cities in 2014 is 10 so multiply by three because we're to have three cities so and this is going to give you 70 and then divided by 70 so the cpi for 2014 is 100 so now moving on to 2015 um the price of karaoke is 60 and we're to have one karaoke then the price of cities is 12 and we have to have three cities.

02:16 So when you multiply this you get 96, then divided by 70, and this is equal to 1 .37, so the cpi is equal to approximately 137.

02:28 So now moving on to that question, so now the presented change in cpi will be equals to 137 minus 100 divided by 100.

02:41 Now this is going to give you a 37 % inflation rate so that's the answer now moving on to the second question using um a method similar to the gdp deflator so you're going to use a gdp deflator this time compute the percentage change in the overall price level we're going to be using the gdp deflator method and we're to use 2014 as the base year so for 2014 the nominal gdp would be 10 because they are 10 karaoke quantities multiplied by 40 which is a price plus there are 30 quantities of cds and the price is $10 so this will give you 700 now for 2015 the nominal gdp is 12 the total quantities of karaoke machines and the price is the price is 60 for 2015 plus there are 50 quantities of cds on table and the price is $12.

04:04 So this will give you $1 ,320.

04:08 Now moving on to the real gdp...

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