7. Let in the country of Wonder, only three goods are produced and consumed: good alpha, good beta, and good gamma. The volume of their consumption and prices in 2009 and 2015 are given in the table below. ( $\mathbf{\text { ba points) }}$

|  | 2009 year |  | 2015 year |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Price | Quantity | Price | Quantity |
| Good alpha | 5 | 12 | 6 | 15 |
| Good beta | 7 | 8 | 5 | 10 |
| Good gamma | 9 | 6 | 10 | 2 |

(a) Based on the data in the table, calculate:

1) nominal and real GDP for 2009 and 2015, assuming that the base year is 2009;
2) the growth of real GDP in $\%$;

(b) As an estimate of the inflation level in the year of interest to economists, some countries use the value of the Consumer Price Index (CPI), which is calculated as the result of dividing the cost of the consumer basket of the base year at the prices of the year of interest by the cost of the consumer basket of the base year at the prices of the base year, multiplied by $100 \%$. Calculate the CPI for 2015 based on the data in the table.

(c) Economists believe that the CPI distorts the real level of inflation. One of the reasons for such distortion they call the fact that the CPI is calculated based on the consumer basket of the base year, not the year of interest to them. Provide at least one example confirming the economists' assumption and justify it.
# Solution:

(a) Since 2009 is the base year, the real and nominal GDP in this year are the same and equal to:

$\mathrm{Y}_{\mathrm{n}}{ }^{09}=\Sigma \mathrm{p}_{\mathrm{i}}{ }^{0} \mathrm{q}_{\mathrm{i}}{ }^{0}=5 * 12+7 * 8+9 * 6=60+56+54=170$.

Nominal GDP for 2015: $\mathrm{Y}_{\mathrm{n}}{ }^{15}=\Sigma \mathrm{p}_{\mathrm{i}} \mathrm{q}_{\mathrm{i}}{ }^{\mathrm{t}}=6 * 15+5 * 10+10 * 2=90+50+20=160$.

Real GDP for 2015: $\mathrm{Y}_{\mathrm{r}}{ }^{15}=\Sigma \mathrm{p}_{\mathrm{i}}{ }^{0} \mathrm{q}_{\mathrm{i}}{ }^{\mathrm{t}}=5 * 15+7 * 10+9 * 2=75+70+18=163$.

The growth of real GDP is $\left(\mathrm{Y}_{\mathrm{r}}^{15}-\mathrm{Y}_{\mathrm{r}}{ }^{09}\right) / \mathrm{Y}_{\mathrm{r}}^{09}=(163-170) / 170=-0.0412=-4.12\%$.

(b) The Consumer Price Index (CPI) is $(12 * 6+8 * 5+6 * 10) / 170=(72+40+60) / 170=101.17\%$.

(c) An example of the required situation can be when the consumer basket changes significantly over the period (several years). For instance, the development of technology allows switching to devices with different functionality, which naturally reduces the demand for previously used technology, and consequently, lowers its price. The CPI, calculated based on the old consumer basket, in this case, would account for the price changes of goods that a large number of consumers have stopped using, and would not reflect the actual situation with the prices of "new" goods that are consumed in the year of interest to economists.

## Grading Criteria:

(a) Correctly calculated each type of GDP - 1 point each (total 3 points).

Correctly calculated the growth of real GDP - **1** point.

(b) Correctly calculated the CPI - **2** points.

(c) Provided an example - **3** points.