Question

*** Please kindly type answer ***

In Imaginary County, there are only three goods: pretzel, movie shows and water. The following table shows the prices and quantities produced of these goods in 1990 and 2000.

	Price in 1990	Price in 2000
Pretzel	1.00	1.00
Theatre Shows	5.00	10.00
Water	0.70	0.80

The consumption basket of a typical consumer is made up of 5 pretzels, 3 movie shows and 3 bottles of water.

1. Compute the consumer price index (CPI) for 1990 (assume that the base year is 1990).
2. Compute the consumer price index (CPI) for 2000 (assume that the base year is 1990).
3. What was the inflation rate from 1990 to 2000, using the CPI you calculated in a and b?

Answer 1

Answer:

CPI = [Cost of Bundle in Current Year / Cost of Bundle in Base Year] * 100

So

Cost of Bundle in Year 1990 = 5*1 + 3*5 + 3*0.7 = 22.1

Cost of Bundle in Year 2000 = 5*1 + 3*10 + 3*0.8 = 37.4

A]

CPI for 1990(Assuming base year 1990)

CPI of year 1990 = Cost of Bundle in Year 1990/ Cost of Bundle in Base year * 100

= 22.1/22.1 * 100 = 100

CPI of year 1990 = 100

B]

CPI of year 2000 = Cost of Bundle in Year 2000/ Cost of Bundle in Base year * 100

= 37.4/22.1 * 100 = 169.231

CPI of year 2000 = 169.231

C]

Inflation rate = [CPI of year 2000 - CPI of year 1990] / CPI of year 1990 * 100

= [169.231 – 100] / 100 * 100

= 69.231%

Inflation rate = 69.231%