Question

Calculate the CPI using the following data. Assume that there is one of each item in the market basket.

Market basket Apples lb. Oranges lb. Bananas lb. Cereal box Milk gal.

Prices base yr. $ 0.45 $0.35 $0.20 $3.00 $2.40

Prices base yr.+1 $0.60 $0.30 $0.25 $3.20 $2.45

The value of the market basket in the base year is

The value of the market basket in the base year plus one is

The CPI in the base year is

The CPI in the base year plus one is

There has been inflation or deflation __________ of ____________ percent.

Answer 1

Solution:

The value of the market basket in the base year = 0.45+0.35+0.20+3.00+2.40 = $6.40

The value of the market basket in the base year plus one = 0.60+0.30+0.25+3.20+2.45 = $6.80

The CPI in the base year = {(The value of the market basket in the base year)/(The value of the market basket in the base year)}*100 = (6.4/6.4)*100 = 100

The CPI in the base year plus one = {(The value of the market basket in the current year)/(The value of the market basket in the base year)}*100 = (6.8/6.4)*100 = 106.25

Inflation = ((CPI in the base year plus one-The CPI in the base year)/The CPI in the base year)*100 = ((106.25-100)/100)*100 = 6.25%

Hence, there has been inflation of 6.25%.