1) In year 1 and year 2, there are two products produced in a given economy, cars and beef. Suppose that there are no intermediate goods. In year one, 200 cars are produced and sold at $15,000 each, and in year two, 250 cars are sold at $16,000 each. In year one, 1,000,000 pounds of beef are sold for $7.00 each, and in year two, 1,000,000 pounds are sold for $8.00 each.
(a) Calculate real GDP in each year, and the percentage increase in real GDP from year 1 to year 2 using year 1 as the base year. Next, do the same calculations using the chain-weighting method.
(b) Calculate the implicit GDP price deflator and the percentage inflation rate from year 1 to year 2 using fixed price real GDP using year 1 as the base year. Next, do the same calculations using the chain-weighting real GDP.
(c) Suppose that cars in year 2 are better than cars in year 1. That is, cars are of higher quality in year 2 in the sense that one car in year 2 is equivalent to 1.2 cars in year 1. How does this change your calculations in parts (a) to (c)? Explain any differences.