Question 1
a Discuss two reasons why the GDP deflator gives a different rate of inflation than the CPI does. In calculating the real GDP of an economy, explain whether you will use the GDP deflator or the CPL.
b The Gini coefficient in Hong Kong was 0.525 in 2001 and 0.533 in 2006. Explain whether income inequality in Hong Kong has decreased or increased between these years. If an economy has a Gild coefficient of 1.000, what is the distribution of income?
Question 2
a Suppose your salary for this year remains the same as last year. Does that mean your real income remains the same? Explain.
b Suppose the people of an economy consume only two goods, namely food and clothing. The production of goods and services in this economy consists of 50 units of food, 100 units of clothing and 40 units of machinery for production for both years.
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Food
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Clothing
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Machinery for production
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Year 1 price
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$10
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$5
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$20
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Year 2 price
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$15
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$10
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$25
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i Find the nominal GDP for the current year and the base year. Show all your workings.
ii What is the percentage increase in the CPI?
iii What is the percentage increase in the GDP deflator?