Answer to Question #267813 in Microeconomics for Vincent

Question

a The values of consumer price index (CPI) for 2005 and 2018 are 78.8 and 272.6 respectively while the average annual income of poultry farmer is given as N216,000 and N360,000 accordingly. Comment on the welfare of the poultry farmer using the purchasing power of the income received between, the two years under consideration.

Answer 1

Consumer price index shows the cost of living of population . There is inverse relationship with CPI standard of living ( cost of living ) 

CPI of 2005 = 78.8

CPI of 2018= 272.6

Therefore the gwoth rate of CPI or inflation or u can say price is$= \frac{[(CPI \space of\space 2018) - (CPI \space of\space 2005)]}{CPI\space of \space 2005}$

Growth rate of CPI is$=\frac{(272.6-78.8)}{78.8}$

= 2.46 which is 246% 

. This means that inflation rate grown very fast which reduces the purchasing power of people . Because in inflation the value of money decreases . 

As per their income N216,000 in 2005 they were able to buy 2741.11 or 2741 quantity with given level of income so the real income in 2005 was 2741quantity ( purchasing power ) .

 

But in 2018 they have their Nominal income = N360,000 but CPI of 2018 is 272.6 . So their Real income will be 1320.6 or 1321quantity . 

Which is lower than before . 

This indicates that their real income has drastically reduced due to high inflation rate growth . 

Their living standards will be low as their welfare state will decline because poultry farmers are able to purchase less quantity than they were able to buy in 2005. 

 

Conclusion :- 

Due to increase in inflation rate their real income has declined and their purchasing power has been low . Which directly effect their welfare negatively .