Beer and Sausage are the sole goods in a simple economy. In year 1 a beer $2.0 and a sausage costs $5.0, whereas in year 2 a beer $2.0 and a sausage costs $10.0. In year 1, 10 sausages and 10 beers are formed. In year 2, 6 sausages and 8 beers are formed. The basket of goods defining the Consumer Price Index (CPI) is 10 sausages and 10 beers.
a. Determine the nominal GDP in period 1 and period 2.
b. Explain the real GDP in period 1 and period 2 when year 1 is treated as the base year.
3. Describe the real GDP in period 1 and period 2 when year 2 is treated as the base year.
4. Determine the growth rates of real GDP using a chain-weighting approach.
5. Describe the rate of inflation using the implicit GDP price deflator when year 1 is treated as the base year.
6. Determine the CPI in year 1 and year 2, when the year 1 is treated as the base year?
7. Does the change in the CPI between year 1 and 2 overstate, understate or correctly state the change in the cost of living?