Question

The

consumer price index (CPI)

is a​ fixed-weight index. It compares the price of a fixed bundle of goods in one year with the price of the same bundle of goods in some base year.

Suppose the market basket to compute the consumer price index consists of

200

units of good​ X,

175

units of good ​Y, and

60

units of good Z. Year 2013 is the base

year.

Prices of these goods for the years​ 2013, 2014, and 2015 are given below.

Good	Amount in Market Basket	Prices in 2013	Prices in 2014	Prices in 2015
X	200	​$2.50	​$3.50	​$4.50
Y	175	2.50	3.50	3.75
Z	60	4.00	5.00	4.20

Using the information​ above, calculate the​ following:

The cost of the market basket in 2013 is

​$nothing.

​(Round

your response to two decimal

places.​)

The cost of the market basket in 2014 is

​$nothing.

​(Round

your response to two decimal

places.​)

The cost of the market basket in 2015 is

​$nothing.

​(Round

your response to two decimal

places.​)

Calculate the CPI for each year.

​(Round

your responses to two decimal

places.​)

CPI in 2013	nothing
CPI in 2014	nothing
CPI in 2015	nothing

The rate of inflation between 2013 and 2014 is

nothing​%.

​(Round

your response to two decimal

places.​)

The rate of inflation between 2014 and 2015 is

nothing​%.

​ (Round

your response to two decimal

places.​)

Answer 1

Solution:

Cost of market basket in a year = prices in that year*market basket

So, cost of market basket in year:

2013 = 200*2.5 + 175*2.5 + 60*4 = 500 + 437.5 + 240 = $1,177.5

2014 = 200*3.5 + 175*3.5 + 60*5 = 700 + 612.5 + 300 = $1,612.5

2015 = 200*4.5 + 175*3.75 + 60*4.2 = 900 + 656.25 + 252 = $1,808.25

Consumer price index (CPI) = (cost of market basket in a given year/cost of market basket in base year)*100

With base year as 2013, CPI in year:

2013 = (1177.5/1177.5)*100 = 100

2014 = (1612.5/1177.5)*100 = 136.94

2015 = (1808.25/1177.5)*100 = 153.57

Finally, rate of inflation = (CPI in final year - CPI in previous year)*100/CPI in previous year

So, inflation rate between:

2013 and 2014 = (136.94 - 100)*100/100 = 36.94%

2014 and 2015 = (153.57 - 136.94)*100/136.94 = 12.14%