The consumer price index (CPI) is a fixed-weight index. It compares the price of
ID: 1219646 • Letter: T
Question
The consumer price index (CPI) is a fixed-weight index. It compares the price of a fixed bundle of goods in one year with the price of the same bundle of goods in some base year. Suppose the market basket to compute the consumer price index consists of 100 units of good x, 300 units of good y and 25 units of good z. Year 2011 is used as the base year. Prices of these goods for the years 2011, 2012 and 2013 are given below. Using the above information we can calculate the following: In any given year, the cost of the market basket is the cost of buying the amounts of the items included in the market basket using that year's prices. Thus, the cost of the market basket in 2011 = (P of 'x' in a year times Q of 'x' in base year) + (P of 'y' in a year times Q of 'y' in base year) + (P of 'z' in a year times Q of 'z' in base year) = $2.50 times 100 + $1.50 times 300 + $4.00 times 25 = $800 (Enter your response rounded to two decimal places.)Explanation / Answer
See, in this question we have to find the CPI which is an index of inflation, using the prices of the goods and the quantities of the respective goods produced in the country.
In any year, the cost of the basket of the goods is computed by multiplying the quantity of the good with its price. This is done for all the goods mentioned. Then summing it up will give us the cost of the basket of the goods. The same procedure is done for all the years mentioned.
Then to compute CPI in an year, we have to choose a base year which is used as denominator in the formula of CPI. IT is used for comparing the value of the basket of the goods in the current year with respect to the chosen year as the base year.
As calculated in the answer , Price of the basket in 2011 = $800
Price of the basket in 2012 = 3.50 * 100 + 300 * 1.95 + 25 8 4.40 = $ 1045
Price of the basket in 2013 = 100 * 4.75 + 300 * 2.25 + 25 * 4.20 = $1255
Let us consider 2011 as the base year. So, CPI in 2011 = 100
CPI in 2012 = Cost of the basket in 2012 / Cost of the basket in 2011 * 100 = 1045 / 800 * 100 = 130.625
CPI in 2013 = Cost of the basket in 2013 / Cost of the basket in 2011 * 100 = 1255 / 800 * 100 = 156.875
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