Question

Year

One Bag of Rice

One Soft Drink

A Loaf of Bread

Total Cost of Bundle

2016

₦5.00

₦8.00

₦3.00



2017

₦5.50

₦8.50

₦3.00



2018

₦6.00

₦8.50

₦3.00





If we select two bags of rice, (a) obtain the total cost of bundle in each period and the price index for 2017 and 2018 respectively taken 2016 as the base year.

b. Obtain the inflation rate for 2017 and 2018.

2. Suppose consumers change their consumption patterns over time in response to relative price changes, what implication does this have for the computation of price index?

Answer 1

Answer on Question #81858 - Economics- Macroeconomics

**Question:**

If we select two bags of rice,

(a) obtain the total cost of bundle in each period and the price index for 2017 and 2018 respectively taken 2016 as the base year.

**Solution:**

the total cost of bundle is:

(total cost of bundle 2017/total cost of bundle 2017 in prices of 2016), i.e: $(2*5,50+1*8,50+1*3)/(2*5,00+1*8,00+1*3,00)$

(total cost of bundle 2018/total cost of bundle 2018 in prices of 2016), i.e: $(2*6,0+1*8,50+1*3)/(2*5,00+1*8,00+1*3,00)$

**Answer:**

price index is:

**Question:**

Obtain the inflation rate for 2017 and 2018.

**Solution:**

((price index 2017 - price index 2016) / price index 2016) * 100%, i.e: (1,0714 - 1) / 1 * 100)

((price index 2018 - price index 2016) / price index 2016) * 100%, i.e: (1,1190 - 1) / 1 * 100)

Notes: [price index 2016 = 1 because 2016 is base year]

**Answer:**

the inflation rate is:

**2. Question:**

Suppose consumers change their consumption patterns over time in response to relative price changes, what implication does this have for the computation of price index?

**Answer:** To calculate the price index, we use the formula for the ratio of the consumer basket of the current year in prices of the base year to the consumer basket of the base year in basic prices (See examples of price index calculation above).

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