L1. (6 Points) using the below table and using 2003 as the base vear, calculate

Question

L1. (6 Points) using the below table and using 2003 as the base vear, calculate Shem's inflation rate between 2003 to 20042 Show your step fully! Casel: In the country of Shem, the CPI is calculated using a market basket consisting of 15 apples, 5 loaves of bread, 3 robes and 20 gallons of gasoline. The per-unit prices of these goods have been as follows: Year 2002 2003 2004 2005 Apples $1.00 S1.00 $2.00 S3.00 Bread $2.00 $1.50 $2.00 $3.00 Robes $10.00 $9.00 $11.00 $15.00 Gasoline $1.00 $1.50 $2.00 $2.50

Explanation / Answer

The base year is 2003.

The CPI for base year is always 100.

So, CPI for 2003 is 100.

Value of market basket at base year price = (15 * $1) + (5 * $1.50) + (3 * $9) + (20 * $1.50)

Value of market basket at base year price = $15 + $7.50 + $27 + $30 = $79.50

Value of market basket at 2004 price = (15 * $2) + (5 * $2) + (3 * $11) + (20 * $2)

Value of market basket at 2004 price = $30 + $10 + $33 + $40 = $113

Calculate CPI for year 2004 -

CPI = [Value of market basket at 2004 price/Value of market basket at base year price] * 100

CPI = [$113/$79.5] * 100 = 142.14

The CPI for year 2004 is 142.14

Calculate the Inflation rate -

Inflation rate = [(CPI for year 2004 - CPI for year 2003)/CPI for year 2003] * 100

Inflation rate = [(142.14 - 100)/100] * 100

Inflation rate = 42.14%

Shem's inflation rate between 2003 to 2004 is 42.14%.

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