Question

Imagine you are asked to help in the calculation of the cost of living and inflation in a particular country. (show the formulas) The basket of goods and services to estimate the CPl in this country is composed by 7kg of pasta and 3lt of wine BASKET of GOODS Price of pasta (S/kg) Price of wine (S/it) 2018 2017 2016 1.5 6,3 0.9 5.9 1.2 5.5 a) Calculate the cost of the basket for each year (10%). b) Considering 2016 as the base year, calculate the CPI for each year (10%). c) Calculate the inflation rate for every year (10%).

Answer 1

Ans A)

Cost of the basket for year 2016= Price of Pasta in 2016*Quantity of Pasta Wine 2016+Price of Wine in 2016*Quantity of Wine of 2016=1.2*7+5.5*3=$24.9

Cost of the basket for year 2017= Price of Pasta in 2017*Quantity of Pasta Wine 2017+Price of Wine in 2017*Quantity of Wine of 2017=0.9*7+5.9*3=$24

Cost of the basket for year 2018= Price of Pasta in 2018*Quantity of Pasta Wine 2018+Price of Wine in 2018*Quantity of Wine of 2018=1.5*7+6.3*3=$30.4

Ans B)

CPI in 2016= Cost of Basket in 2016 with 2016 prices/Cost of Basket in 2016 with base year Prices=100%

CPI in 2017=Cost of Basket in 2017 with 2017 prices/Cost of Basket in 2017 with base year Prices= (24/(1.2*7+5.5*3))=24/24.9*100=96.28%

CPI in 2018=Cost of Basket in 2018 with 2018 prices/Cost of Basket in 2018 with base year Prices=(30.4/24.9)*100=122.088%

Ans C)

Inflation between year 2016-17=CPI in 2017-CPI in 2016/CPIP in 2016=0.9628-1/1=-3.72%

Inflation between year 2017-18=CPI in 2018-CPI in 2017/CPIP in 2017=(122.088-96.28)/96.28=26.805%