Answer to Question #92313 in Macroeconomics for Unknown287159

Question

The people on thohoyandou island buy only juice and cloth .the CPI basket contains the quantities bought in 2010. The average households spent $60 on juice and $30 on cloth in 2009 when the price of juice was $2 a bottle and the price of cloth was $5 a meter. In the current year, 2010 , juice is $4 a bottle and cloth is $6 a meter .
Calculate :
1. CPI per basket and
2. The inflation rate

Answer 1

1. CPI per basket

Consumer price index (CPI) refers to a measure of an economy’s general price. During a base year, the value of CPI equals to 100 with the CPIs in all the other years in relation to the base year.

In order to calculate the CPI per basket, we first need to find the total value of the CPI basket. In this case the CPI basket for 2009 is;

$60 + $30= $ 90.

The number of units of juice in the CPI basket in 2009 is the total amount spent by consumers divided the cost per bottle. That is, units in 2009 are;

$60/$2= 30 units of bottles for juice

$30/$5= 6 meters for cloth

Thus, in 2010 when the price of juice increases to $4 in 2010,  and price of cloth to $6, the amount that average household will spend on juice and cloth respectively is;

30 bottles x $4= $120.

6meters x $6= $36

Thus, in 2010, the CPI basket is;

$120 + $36= $156

Thus, CPI in 2010= (CPI in 2010/CPI in 2009) x 100

                            = $156/90 x100

                            = 173.3

2. The inflation rate

Inflation rate equals to change in percentage in the CPI

($156-$90)/$90 x 100

73.3%