a. The following table summarizes the price indices in May 2015 and in May 2016.

Question

a. The following table summarizes the price indices in May 2015 and in May 2016. The household expenditure weights of different sub-indices of the CPI are as follows Price indices in May 2016 131.3 146.4 134.6 138.1 109.5 118.5 119.7 137.3 114.5 Price indices in May 2015 130.2 144.3 Household expenditure weights 231 387 36 Item 1 Food 2Housing 3 Electricity, gas and water 135.7 4 Alcohol and tobacco 5 Clothing and footwear 6Durable goods 7 Miscellaneous goods 8Transport 9 Miscellaneous services 138.4 110.5 118.4 119.7 136.3 113.8 57 34 109 239 i. Calculate the Price Ratio of each sub-indices in May 2016 ii. What is the all-commodity price ratio in May 2016? iii. Given that the CPI in May 2015 is 136.6 as the base, calculate the CPI in May 2016 iv. Comment on CPI in May 2016 whether it affects your standard of living December) Year CPI b. The following are the CPI values in Hong Kong for 2010 to 2015 (recorded in 2010 2011 2012 2013 2014 2015 102.9 108.8 112.9 123.4 126.2 i. Calculate the inflation rate in 2011, 2012, 2013, 2014, and 2015 ii. What is the inflation rate from 2010 to 2015? ii. If you held S1,000,000 in a safety box at home starting in 2010, what would its present value be in 2015? iv. Comment on the inflation rate from 2011 to 2015. What is the impact it has on your life?

Explanation / Answer

a)

i.

the follow formula was used:

ii. 131.34 . You just need to multiply each individual price by its weight and make the sumation of all of it and multiply that result by 100

iii. to obtain the result you just need to divide the last result by the index gave it in the question and multiply it by 100

The result is equal to 96.16

iv. we are seeing a deflation of prices which could be bad or good depending on the situation. It could be bad for the economy as a whole but good for certain time for the people.

A deflation means a generalized reduction in the level of prices which creates an initial reduction in prices but does not encourage investments. The money loses purchasing power and the people prefer to spend it while still has some value.

b.

i. 2011= 5.73, 2012= 3.76, 2013= 4.25, 2014= 4.84, 2015= 2.26 ( all numbers are expresed in percentages). The formulas are similar to the last question, divide the current price level by the last year price index, then multiply it by 100 and rest 100 to that.

ii. 22.64 %

iii. $ 773,600. We need to remember that the money lost 22% of its purchasing power, which means that we need to rest that percentage to the original quantity.

iv. The inflation in this particular spawn of time was increasing. The problem with inflation is the eventual loss in the value of money which means you need more money to buy the same goods; therefore, it means that you need to earn more to compensate the value loss but sometimes for a worker its impossible.

Item Price Ratio food 100.8448541 housing 101.4553015 electricity, gas and water 99.18938836 alcohol and tabaco 99.78323699 clothing and footwear 99.09502262 durable goods 100.0844595 miscellaneous goods 100 transport 100.7336757 miscellaneous services 100.6151142

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