Macroeconomics: Question 3 Discuss the problems with the Consumer Price Index. Consider a nation obsessed with Coke
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Question:
Macroeconomics:
Question 3
- Discuss the problems with the Consumer Price Index.
- Consider a nation obsessed with Coke Studio. All they produce and consume are DVDs and karaoke mics, in the following amounts:
Karaoke MicsDVDs
QuantityPriceQuantityPrice
202010Rs.4,00030Rs.1,000
2021126,000501,200
- Using a method similar to the CPI, compute the percentage change in the overall price level. Use 2020 as the base year and fix the basket at 3 DVDs and 1 karaoke mic.
- Using a method similar to the GDP deflator, compute the percentage change in the overall price level. Again, use 2020 as the base year.
- Is the inflation rate in 2021 the same using the two methods? Explain why or why not.
Question 4
- If you are given a choice to live in a country with high level of GDP and low growth rate or to live in a low level of GDP and a high growth rate, which option would you choose and why?
- Assume a hypothetical society that decides to reduce consumption (production of consumption goods) and increase investment (production of capital goods).
- How would this change affect economic growth?
- What groups in society would benefit from this change? What groups might be hurt?
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