Consider an economy with the following prices and quantities in period 0 and 1 respectively. Apples...

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Consider an economy with the following prices and quantities in period 0 and 1 respectively. Apples Oranges Bananas Period 0 Period 1 Price (dollars/kg) Quantity (kg) Value (dollars) Price (dollars/kg) Quantity (kg) Value (dollars) 2 20 40 2.5 16 40 1 40 40 1 40 40 0.5 40 20 1 20 20 A. Calculate the Laspeyres, Paasche and Fisher price and quantity indexes. What are inflation and real GDP growth in this economy for the Fisher index? B. Compare the Laspeyres and Paasche price and quantity indexes. Is one larger than the other? Explain the economic logic for the difference. C. Suppose that in period 2, orange farmers innovate, and discover it is possible to create seedless oranges, and this is the only kind of orange available in period 2. However, prices do not go up for oranges, and the new prices and quantities are as follows. Now focus on calculating price and quantity index growth between Period 1 and Period 2 (not Period 0 and 1 like in the earlier parts), ignoring the change in quality for oranges. Do you think your price index is biased? In which direction? Why? Period 2 Price (dollars/kg) Quantity (kg) Value (dollars) Period 3 Apples 2.5 12 30 Oranges (seedless) 1 60 60 Bananas D. Suppose alternatively that Passion Fruits are introduced into this economy in Period 3. Suppose they are "linked into the index" (as is common in practice) so only Apple, Orange, and Banana prices and quantities are used in calculating inflation between Periods 2 and 3. What biases would arise? Price (dollars/kg) Quantity (kg) Value (dollars) 1 10 10 Apples 2.5 10 25 Oranges 1 20 20 Bananas 1 20 20 Passion Fruits 3.5 10 35 E. Over the course of US history, the products available for consumers to buy have improved dramatically. What problems arise for economic measurement as a consequence of this phenomenon. Will economic growth be overestimated or underestimated? Will inflation be overestimated or underestimated? (See Nordhaus, 1998). Consider an economy with the following prices and quantities in period 0 and 1 respectively. Apples Oranges Bananas Period 0 Period 1 Price (dollars/kg) Quantity (kg) Value (dollars) Price (dollars/kg) Quantity (kg) Value (dollars) 2 20 40 2.5 16 40 1 40 40 1 40 40 0.5 40 20 1 20 20 A. Calculate the Laspeyres, Paasche and Fisher price and quantity indexes. What are inflation and real GDP growth in this economy for the Fisher index? B. Compare the Laspeyres and Paasche price and quantity indexes. Is one larger than the other? Explain the economic logic for the difference. C. Suppose that in period 2, orange farmers innovate, and discover it is possible to create seedless oranges, and this is the only kind of orange available in period 2. However, prices do not go up for oranges, and the new prices and quantities are as follows. Now focus on calculating price and quantity index growth between Period 1 and Period 2 (not Period 0 and 1 like in the earlier parts), ignoring the change in quality for oranges. Do you think your price index is biased? In which direction? Why? Period 2 Price (dollars/kg) Quantity (kg) Value (dollars) Period 3 Apples 2.5 12 30 Oranges (seedless) 1 60 60 Bananas D. Suppose alternatively that Passion Fruits are introduced into this economy in Period 3. Suppose they are "linked into the index" (as is common in practice) so only Apple, Orange, and Banana prices and quantities are used in calculating inflation between Periods 2 and 3. What biases would arise? Price (dollars/kg) Quantity (kg) Value (dollars) 1 10 10 Apples 2.5 10 25 Oranges 1 20 20 Bananas 1 20 20 Passion Fruits 3.5 10 35 E. Over the course of US history, the products available for consumers to buy have improved dramatically. What problems arise for economic measurement as a consequence of this phenomenon. Will economic growth be overestimated or underestimated? Will inflation be overestimated or underestimated? (See Nordhaus, 1998).

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A Calculation of Price and Quantity Indexes Laspeyres Price Index Period 0 2 20 1 40 05 40 2 20 1 40 05 40 10 Period 1 25 16 1 40 1 20 2 20 1 40 05 40 095 Paasche Price Index Period 0 2 20 1 40 05 40 ... View the full answer