In: Economics
Problem 3
Below, you are provided with two years of data on the quantities of two goods that the average, urban family offour consumes and the market price of each. You will use these data to calculate the Consumer Price Index (CPI) and inflation rate.
Cheese and Chocolate are two goods that are consumed in Holland. Many other final goods and services areconsumed in Holland, but for simplicity, we will assume that Cheese and Chocolate are the only two final goodsconsumed in the country. The table below provides the quantity of Cheese and Chocolate that are consumed bythe average, urban family of four in Holland in two different years. The table also provides the price of a Cheeseand the price of chocolate in each year.
Year |
Quantity of Chocolate |
Price of chocolate |
Quantity of Cheese |
Price of cheese |
2016 |
150 |
€10.50 |
45 |
€15.00 |
2017 |
165 |
€13.00 |
52 |
€17.00 |
Suppose that 2016 is the base year.
Year |
Quantity of Chocolate |
Price of chocolate |
Quantity of Cheese |
Price of cheese |
2016 |
150 |
€10.50 |
45 |
€15.00 |
2017 |
165 |
€13.00 |
52 |
€17.00 |
Given,
2016 is the base year
The price of the basket of goods in 2016 = Quantity of Chocolates in 2016 x Price of chocolates in 2016 + Quantity of Cheese in 2016 x Price of Cheese in 2016 = 150 x €10.50 + 45 x €15.00 = €1575 + €675 = €2250
As 2016 is the base year, the CPI in the base year = 100 = CPI in 2016
The price of the basket of goods in 2017 = Quantity of Chocolates in 2016 x Price of chocolates in 2017 + Quantity of Cheese in 2016 x Price of Cheese in 2017 = 150 x €13.00 + 45 x €17.00 = €1950 + €765 = €2715
CPI in 2017 = Price of the basket of goods in 2017/Price of the basket of goods in the base year(2016) x 100 = €2715/2250 x 100 = 120.67
Inflation rate in 2017 = (CPI in 2017 - CPI in 2016)/CPI in 2016 x 100 = (120.67-100)/100 x 100 = 20.67% = 20.7% (rounded to the nearest one-tenth of one percent)