Different measures of Inflation

An economy produces two goods A and B. Both households and the government purchase goods A and B. Use the table below to answer questions 1 and 2.

Production Consumption households Prices

Year Q_A Q_B Q_A Q_B P_A P_B

2017 100 60 70 10 10 20

2018 150 100 70 10 13 30

1. CPI

(a) Compute the cost of the consumption basket for both years.

(b) Compute the CPI for both years. Take 2017 as the base year.

(c) Compute the inflation rate for year 2018.

2. GDP deflator

(a) Compute Nominal GDP for both years.

(b) Compute Real GDP for both years. Take 2017 as the base year.

(c) Compute the GDP deflator for both years. Take 2017 as the base year.

(d) Compute the inflation rate for year 2018 using the GDP deflator.

3. What explains the difference between your answer in 1(c) and 2(d)?