Question

Consider an Economy that produces only Apples and Bananas. The following Table contains per unit price (in INR) and quantity (in kg) of these goods. Assuming 2010 as the Base Year and using GDP deflator to calculate the annual inflation rate, which of the following options is CORRECT?

Year	Price of Apple	Quantity of Apple	Price of Banana	Quantity of Banana
2010	1	100	2	50
2011	1	200	2	100
2012	2	200	4	100

• A. GDP deflator for the year 2011 is 100 and the inflation rate for the year 2011 is 0 %
• B. GDP deflator for the year 2012 is 50 and the inflation rate for the year 2012 is 100 %
• C. GDP deflator for the year 2011 is 50 and the inflation rate for the year 2011 is 0 %
• D. GDP deflator for the year 2012 is 100 and the inflation rate for the year 2012 is 100 %

Answer 1

The Correct Option is A

To solve this problem, we need to calculate the GDP deflator for each year based on the given data and then determine the inflation rate using 2010 as the base year.

Step 1: Understand the GDP Deflator 

The GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy. It is calculated as follows:

\(\text{GDP Deflator} = \left( \frac{\text{Nominal GDP}}{\text{Real GDP}} \right) \times 100\)

Step 2: Calculate Nominal and Real GDP

Nominal GDP is calculated using current year prices and quantities, while Real GDP is calculated using base year prices and current year quantities.

Year	Nominal GDP	Real GDP	GDP Deflator
2010	\( (1 \times 100) + (2 \times 50) = 200 \)	\( (1 \times 100) + (2 \times 50) = 200 \)	\( \frac{200}{200} \times 100 = 100 \)
2011	\( (1 \times 200) + (2 \times 100) = 400 \)	\( (1 \times 200) + (2 \times 100) = 400 \)	\( \frac{400}{400} \times 100 = 100 \)
2012	\( (2 \times 200) + (4 \times 100) = 800 \)	\( (1 \times 200) + (2 \times 100) = 400 \)	\( \frac{800}{400} \times 100 = 200 \)

Step 3: Calculate Inflation Rate

The inflation rate is calculated using the GDP deflator between two consecutive years and is given by:

\(\text{Inflation Rate} = \left( \frac{\text{GDP Deflator in Current Year} - \text{GDP Deflator in Previous Year}}{\text{GDP Deflator in Previous Year}} \right) \times 100\%\)

• Inflation Rate for 2011: The GDP deflator in 2011 and 2010 is 100, hence the inflation rate is:
• \(\frac{100 - 100}{100} \times 100\% = 0\%\)
• Inflation Rate for 2012: The GDP deflator in 2012 is 200 and in 2011 is 100, hence the inflation rate is:
• \(\frac{200 - 100}{100} \times 100\% = 100\%\)

Conclusion

The correct option is: GDP deflator for the year 2011 is 100 and the inflation rate for the year 2011 is 0%. This is because the GDP deflator remained constant from 2010 to 2011, leading to a 0% inflation rate for that year.