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

We should find the same inflation rate whether we use Y1 as 100 or Y4 as 100. Let's see the calculations below:

If Y1 = 100

Y4 would be 1070 * 100 / 940 = 113.83 and inflation is 13.83% between Y4 and Y1.

If Y4 = 100

Y1 would be 940 *100 / 1070 = 87.85, and inflation would be (100 - 87.85) / 87.85 = 13.83% between these two years.