Suppose that the chain-weighted index for GDP in Panama was 180 in 2015 and 188 in 2016. The inflation rate between those two years was approximately
A) 1.1 percent.
B) 4.4 percent.
C) 8 percent.
D) 10.4 percent.

Question

Quizplus · Accepted Answer

To calculate the inflation rate using the chain-weighted index approach, we take the growth rate of real GDP between the two years and then subtract it from the growth rate of nominal GDP. In this case, the growth rate of real GDP is:
(188 - 180)/180 = 4.4%
To calculate the growth rate of nominal GDP, we use the formula:
(1 + nominal growth rate) = (1 + inflation rate) x (1 + real growth rate)
We know that the real growth rate is 4.4%, so we can solve for the inflation rate as follows:
(1 + nominal growth rate) = (1 + inflation rate) x 1.044
1 + nominal growth rate = 1.044 + 1.044 x inflation rate
nominal growth rate = 0.044 + 1.044 x inflation rate
We know that nominal GDP grew from 2015 to 2016, so nominal growth rate is positive. Therefore, we can conclude that inflation rate is approximately 4.4%.

Suppose That the Chain-Weighted Index for GDP in Panama Was