In: Economics
Column1 |
Column2 |
Column3 |
Column4 |
|
price |
Price |
Quantity in a typical basket |
Price |
|
1982 |
in 2011 |
in 1982 |
in 2015 |
|
Item |
||||
Button-down shirts |
35 |
$55 |
12 |
$85 |
Loafers |
45 |
65 |
10 |
85 |
Sneakers |
35 |
70 |
30 |
75 |
Textbooks |
60 |
100 |
25 |
120 |
Jeans |
30 |
42 |
10 |
50 |
Restaurant meals |
18 |
25 |
33 |
32 |
cars |
12000 |
17000 |
30 |
25000 |
tractors |
14000 |
35000 |
50 |
32000 |
computers |
2300 |
1800 |
100 |
1500 |
gas |
0.9 |
2.5 |
1500 |
4 |
food |
400 |
800 |
1000 |
1400 |
Answer a
Total Consumption in 2011 = Sum of Price * Quantity of basket = 55*12+65*10+70*30+100*25+42*10+25*33+17000*30+35000*50+1800*100+2.5*1500+800*1000 = 660+650+2100+2500+420+825+510000+1750000+180000+3750+800000 = $3250905
Hence CPI 2011 = New Consumption/ Old Consumption *Base = 3250905/1210000 *100 = 2.687*100 = 268.7
Total Consumption in 2015 = Sum of Price * Quantity of basket =
85*12+85*10+75*30+120*25+50*10+32*33+25000*30+32000*50+1500*100+4*1500+1400*1000 1020+850+2250+3000+500+1056+750000+1600000+150000+6000+1400000 = $3914676
Hence CPI 2015 = New Consumption/ Old Consumption *Base = 3914676/1210000 *100 = 3.235*100 = 323.5
Hence CPI for 2011 is 268.7 and for 2015 is 323.5
Answer b
Inflation 1982-2015 = (323.5-100)/100 = 223.5/100=2.235 or, 223.5%
No. of years =2015-1982 = 33 years
Hence Annual Average = 223.5%/33 = 6.77%
Answer c
Core Inflation Rate excludes Food and Energy sector items because the prices are volatile for these items.
So, following items will be removed:
Restaurant meals, Gas and Food
Consumption in these items in 1982= 18*33+0.9*1500+400*1000 = 594+1350+400000 = 401944
Hence consumption 1982= 1210000-401944 = 808056
Consumption in these items in 2011= 25*33+2.5*1500+800*1000 = 825+3750+800000 = 804575
Hence consumption 2011= 3250905-804575 = 2446330
Hence CPI Index 2011= 2446330/808056 *100= 302.74
Consumption in these items in 2015= 32*33+4*1500+1400*1000 = 1056+6000+1400000 = 1407056
Hence consumption 2015= 3914676-1407056 = 2507620
Hence CPI Index 2015= 2507620/808056 *100= 310.3
Hence Core Inflation = (310.3-100)/100= 210.3%
Hence Annual Average Core Inflation = 210.3%/33 = 6.37%
Answer d
Real Rate = nominal rate- Inflation = 8-6.77= 1.33%
Hence Real Interest rate = 1.33%