Question

Questions on CPI Scenario 1 A small economy produced and consumed goods X and Y in 2010 and 2011 whose prices are shown in the table below. Price X Price Y 2010 $100 $10 2011 $120 $12

1. Refer to Scenario 1. Assume that the basket is 50 units of good X and 100 units of good Y. Using 2010 as the base year, what is the CPI in each year?

2. Refer to Scenario 1. Assume that the basket is 50 units of good X and 100 units of good Y Using 2010 as the base year, what is the inflation rate in 2011?

3. Refer to Scenario 1. Assume that the basket is 60 units of good X and 120 units of good Y. Using 2011 as the base year, what is the CPI in each year?

4. Refer to Scenario 1. Assume that the basket is 60 units of good X and 120 units of good Y. Using 2011 as the base year, what is the inflation rate in 2011?

Answer 1

Part 1 & 2:

CPI Basket is given as consisting of 50 units of good X and 100 units of good Y

Cost of the basket of goods in 2010 = Quantity of good X in 2010 * Price of good X in 2010 + Quantity of good Y in 2010 * Price of good Y in 2010 = 50 * $100 + 100 * $10 = $5,000 + $1,000 = $6,000

Cost of the basket of goods in 2011 = Quantity of good X in 2010 * Price of good X in 2011 + Quantity of good Y in 2010 * Price of good Y in 2011 = 50 * $120 + 100 * $12 = $6,000 + $1,200 = $7,200

As 2010 is the base year, CPI2010 = 100

CPI2011 = (Cost of the basket of goods in 2011/Cost of the basket of goods in 2010(base year))* 100 = ($7,200/$6,000) *100 = 120

Inflation rate in 2011 = [(CPI2011-CPI2010)/CPI2010]*100 = [(120-100)/100]*100 = 20%

Part 3 & 4:

CPI Basket is given as consisting of 60 units of good X and 120 units of good Y

Cost of the basket of goods in 2010 = Quantity of good X in 2011 * Price of good X in 2010 + Quantity of good Y in 2011 * Price of good Y in 2010 = 60 * $100 + 120 * $10 = $6,000 + $1,200 = $7,200

Cost of the basket of goods in 2011 = Quantity of good X in 2011 * Price of good X in 2011 + Quantity of good Y in 2011 * Price of good Y in 2011 = 60 * $120 + 120 * $12 = $7,200 + $1,440 = $8,640

As 2011 is the base year, CPI2011 = 100

CPI2010 = (Cost of the basket of goods in 2010/Cost of the basket of goods in 2011(base year))* 100 = ($7,200/$8,640) *100 = 83.33

Inflation rate in 2011 = [(CPI2011-CPI2010)/CPI2010]*100 = [(100-83.33)/83.33]*100 = 20%