An economy produces and consumes four goods namely milo, rice, bread and sobolo. The prices and...

An economy produces and consumes four goods namely milo, rice, bread and sobolo. The prices and quantities of these goods over a three-year period are shown in the table below.

Table I: Prices and quantities of milo, rice, bread and sobolo goods over a 3-year period

Year		2017		2018		2019
	Goods	Price	Quantity	Price	Quantity	Price	Quantity
	Milo	GHC8.00	24	GHC9.50	24	GHC10.50	35
	Rice	GHC32.00	16	GHC34.00	16	GHC35.00	22
	Bread	GHC2.00	30	GHC3.00	30	GHC3.00	35
	Sobolo	GHC1.50	15	GHC2.00	15	GHC2.00	20

Question 2

Before computing the Consumer Price Index (CPI), the Ghana Statistical Service (GSS) surveys consumers to determine the “basket of goods” bought by a typical consumer. Assume that the GSS chooses 2018 as its base year and, consistent with the data shown in the Table I in Q.1 decides that the basket of goods in this economy should consist of 24 tins of milo, 16 bags of rice, 30 loaves of bread and 15 bottles of sobolo.

Calculate the inflation rate between 2018 and 2019.
Determine the purchasing power of the Ghana cedi in 2019 and interpret your answer.

Solutions

Expert Solution

Q2) a) i) The inflation rate between 2018 and 2019 is measured by calculating the consumer price index, CPI.

This index is calculated by dividing the value of the basket in the current year/value of basket in base value * 100,

base year = 2018, current year = 2019, basket quantity = 24 tins of milo, 16 bags of rice, 30 loaves of bread, 15 bottles of sobolo

value of basket = price * quantities,

Value of basket in 2018 = 24 * 9.5 + 16 * 34 + 30 * 3 + 15 * 2 = 892

Value of basket in 2019 = 24* 10.5 + 16 * 35 + 30 * 3 + 15 * 2 = 932

CPI = 932/892 * 100 = 104.48

So, the CPI = 100 in 2018 and CPI = 104.48 in 2019,

So, inflation rate between 2018 and 2019 = CPI in 2019 - CPI in 2018/CPI in 2018 * 100

= 104.48 - 100/100 * 100 = 4.48%

ii) The purchasing power is the value of a currency, in terms of the amount of goods or services that one unit of money can purchase.

The purchasing power of a current year is calculated by dividing the base year CPI by current year CPI * 100,

= CPI of 2018/CPI of 2019 * 100 = 100/104.48 * 100 = 95.7% ,

i.e. the purchasing power reduced by (100-95.7) 4.3% from the year 2018 to year 2019.

Rahul Sunny answered 1 year ago

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