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Calculating Real Prices, GDP and Wages

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Assume a basket of products cost $5 million in the base year and the following is true in 2012:

The same basket of products cost $8 million in 2012
GDP = $14.4 trillion
money wages = $96,000/year
the price of gas = $2.80/gallon
the money supply = $1.6 trillion

Now determine the following and explain:

a. Price Index for 2012
b. Real GDP
c. Real wages
d. Real price of gas
e. Real money supply or real balances
f. Price index for 2013 if the inflation rate is 2% from 2012 to 2013.

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Solution Summary

Given data on the price level and the value of certain products in the base year and the current year, this solution gives detailed calculations and explanations of how to determine the following:

a. Price Index for 2012
b. Real GDP
c. Real wages
d. Real price of gas
e. Real money supply or real balances
f. Price index for 2013 if the inflation rate is 2% from 2012 to 2013.

Solution Preview

a)
PI(2012) = Basket(2012) / Basket(Base) x 100
PI(2012) = 8 million / 5 million x 100
PI(2012) = 160

b)
Real GDP(2012) = Nominal GDP(2012) / PI(2012) x 100
Real GDP(2012) = 14.4 ...

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