Question

In an economy, two goods: A and B are purchased in given fixed quantities for the prices shown below. Year Price of A $ Quantity of A Price of B $ Quantity of B 2016 16.00 25 2.00 10 2017 19.40 25 4.00 10 2018 22.80 25 6.00 10 Compute the CPI for each of the 3 years. Show your work.

Answer 1

Total price of basket for each year is as shown below

$2016=16\times 25+2\times 10=420$

$2017=19.40\times 25+4\times 10=525$

$2018=22.80\times 25+6\times 10=630$

2016 is the base year

$CPI=$ price of basket in year x $/$ price of basket in base year $\times 100$

$CPI_{2016}=420/420=100$

$CPI_{2017}=525/420\times 100=125$

$CPI_{2018}=630/420\times 100=150$

inflation rate=(PI for year X)- (PI for base year)$/$ (PI for base year) $\times 100$

inflation rate year 2017$=(125-100)/(100)\times 100=25\%$

inflation rate year 2018$=$ $=(150-100)/(100)\times 100=50\%$