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Pleasure Island is a self-sufficient island economy. All inhabitants are students and everyone has a part- time job to produce all the goods and services. All goods that are used on Pleasure island are produced on the island and all goods are final consumption goods-there is no trade. Econ 102 classes did a comprehensive survey of prices and quantities produced (and consumed) in 1983 and again in 2013. The results of the survey are given in the table below: commodity/ Service 1983 survey----- price in $/unit 2013 Survey--- price in $/unit Shirts Loafers Sneakers Textbooks jeans meals out quantity in 1,000 units 100 100 300 1200 300 1100 quantity in 1,000 units 110 60 390 1140 330 1375 Problem III (8 points) The Consumer Price Index (a)Calculate expenditure weights, i.e., the fraction of total spending accounted for by each of the six items for 1983. (b) Calculate the student price index for 1983 using the weighted average price index method and the 1983 expenditure weights. (C) calculate the student price index for 2013 using the 1983 expenditure weights. (d) what percentage price increase between 1983 and 2013 is indicated by the CPI? Problem IV (8 points) Nominal GDP, Real GDP and the GDP deflator (a)Calculate 1983 nominal GDP in 1983 prices for Pleasure island (b)Calculate 2013 real GDP in 1983 prices for Pleasure Island (C)Calculate the GDP for 2013. (d)What percentage price increase between 1983 and 2013 is indicated by the GDP deflator? Discussion(4 points): Compare the price increase suggested by these two indices, and compare the index estimates to the price increases for individual commodities and services. Overall, do these two indices give drastically different answers? Or do they suggest about the same thing? Explain the formulae you use and show your work for full credit.
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