1. Calculating inflation using a simple price index Consider a fictional price i
ID: 1161027 • Letter: 1
Question
1. Calculating inflation using a simple price index Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student's annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2014, 2015, and 2016 The cost of each item in the basket and the total cost of the basket are shown for 2014 Perform these same calculations for 2015 and 2016, and enter the results in the following table 2014 2015 2016 Price Cost Price Cost Price Cost Quantity in Basket (Dollars) (Dollars) (Dollars) (Dollars) (Dollars) (Dollars) 15 Notebooks Calculators Large coffees Energy drinkS Textbooks Total cost Price index 2 8 100 70 500 100 1,200 1,900 100 70 130 250 50 10 4 120 150 180 Suppose the base year for this price index is 2014Explanation / Answer
Answer:
Following is the complete table -
Items
Quantity
2014
2015
2016
Price
Cost
Price
Cost
Price
Cost
Notebooks
15
2
30
5
75
8
120
Calculators
1
70
70
100
100
130
130
Large Coffees
250
2
500
2
500
2
500
Energy Drinks
50
2
100
4
200
6
300
Textbooks
10
120
1,200
150
1,500
180
1,800
Total Cost
1,900
2,375
2,850
Price Index
100
125
150
The CSPI or price index for 2015 and 2016 in above table are calculated as follows -
Calculate CSPI in 2015 -
CSPI = (Cost of basket in 2015/Cost of basket in 2014) * 100
CSPI = ($2,375/$1,900) * 100
CSPI = 125
Calculate CSPI in 2016 -
CSPI = (Cost of basket in 2016/Cost of basket in 2014) * 100
CSPI = ($2,850/$1,900) * 100
CSPI = 150
Calculate percentage change in CSPI between 2014 and 2015 -
% increase = [(CSPI in 2015 - CSPI in 2014)/CSPI in 2014] * 100
% increase = [(125 - 100)/100] * 100
% increase = 25%
Calculate percentage change in CSPI between 2015 and 2016 -
% increase = [(CSPI in 2016 - CSPI in 2015)/CSPI in 2015] * 100
% increase = [(150 - 125)/125] * 100
% increase = 20%
Between 2014 and 2015, the CSPI increased by 25%. Between 2015 and 2016, the CSPI increased by 20%.
CSPI or price index does not take into account change in quality or introduction of new goods and thus leads to overstating of inflation.
Hence, the correct answer is option (1) and (2).
Items
Quantity
2014
2015
2016
Price
Cost
Price
Cost
Price
Cost
Notebooks
15
2
30
5
75
8
120
Calculators
1
70
70
100
100
130
130
Large Coffees
250
2
500
2
500
2
500
Energy Drinks
50
2
100
4
200
6
300
Textbooks
10
120
1,200
150
1,500
180
1,800
Total Cost
1,900
2,375
2,850
Price Index
100
125
150
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