Question

File + A' Read 34. The total price of purchasing a basket of goods in the United Kingdom over four years is: year 1=£940, year 2=£970, year 3=£1000, and year 4=£1070. Calculate two price indices, one using year 1 as the base year (set equal to 100) and the other using year 4 as the base year (set equal to 100). Then, calculate the inflation rate based on the first price index. If you had used the other price index, would you get a different inflation rate? If you are unsure, do the calculation and find out. no points what has the U.S.

Answer 1

Market price of the basket of goods and services in current year Consumer price index= Market price of the basket of goods and services in base year

Inflation rate CPI in current year – CPI in previous year CPI in previous year x 100

CPI in the base year is 100 and since year 1 is used as the base year, CPI in year 1 equals 100.

970 CPI in year 2 = 940 x 100 = 103.19

Inflation rate in year 2 103.19-100 100 X 100

Inflation rate in year 2 = 3.19 %

1000 CPI in year 3 = x 100 = 106.38 940

Inflation in year 3 = 106.38 - 103.19 103.19 x 100 = 3.09 %

1070 CPI in year 4 x 100 = 113.83 940

113.83 - 106.38 Inflation in year 4 x 100 = 7 % 106.38

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If year 4 is used as base year.

CPI in year 1 940 1070 x 100 = 87.85

CPI in year 2 970 1070 x 100 = 90.65

Inflation in year 2 90.65 - 87.85 87.85 x 100 = 3.19 %

CPI in year 3 1000 1070 x 100 = 93.46

Inflation in year 3 93.46 - 90.65 x 100 = 3.0976% 90.65

Thus we can conclude that by using the other price index, the inflation rate remains the same and the above calculation proves the argument.