Question

Suppose that a typical urban consumer purchases a consumption bundle (CPI Basket) which includes 50 units of books, 100 units of clothes, 200 units of apples, and 300 units of pizza. The following table shows the unit price of each item in various years.

2000	2001	2002	2003
Book	$10	$12	$14	$12
Cloth	$14	$16	$15	$13
Apple	$3	$3	$5	$5
Pizza	$5	$5	$7	$7

Please answer the following questions;

1. Calculate the cost of CPI basket.
2. Choose a base year
3. Calculate Consumer Price Index (CPI)
4. Calculate inflation rate.

Answer 1

The consumption bundle includes 50 units of books, 100 units of clothes, 200 unit of apples and 300 units of pizza.

The cost of basket in 2000 = $( 50 x 10 + 100 x 14 + 200 x 3 + 300 x 5) = $ 4000

The cost of basket in 2001 = $ (50 x 12 + 100 x 16 + 200 x 3 + 300 x 5) = $ 4300

The cost of basket in 2002 = $ (50 x 14 + 100 x 15 + 200 x 5 + 300 x 7) = $ 5300

The cost of basket in 2003 = $ (50 x 12 + 100 x 13 + 200 x 5 + 300 x 7) = $ 5000

let the year 2000 be the base year.

Consumer price index(CPI) = cost of the basket in a year/ cost of the basket x 100

CPI in 2000 = 4000/4000 x 100 = 100

CPI in 2001 = 4300/4000 x 100 = 107.5

CPI in 2002 = 5300/4000 x 100 = 132.5

CPI in 2003 = 5000/4000 x 100 = 125

Inflation rate in 2001 = ((CPI in 2001- CPI in 2000)/ CPI in 2000) x 100 = ((107.5-100)/100) x 100 = 7.5 %

Inflation rate in 2002 = ((CPI in 2002- CPI in 2001)/ CPI in 2001) x 100 =((132.5 -107.5)/107.5) x 100 = 23. 26%

Inflation rate in 2003 = ((CPI in 2003- CPI in 2001)/ CPI in 2002) x 100 =(( 125- 132.5)/132.5 ) x 100 = - 5.66%. In 2003 there is deflation.