Question 1
The Consumer Price Index (CPI) is a measure of the average change in prices over time for a basket of goods and services. Calculate the cost of basket and CPI for the years 2019 to 2021 based on the following information:
The year 2019 is the base year. Use a weight of 25 for bananas, 12 for electricity, and 5 for a doctor’s visit.
| Year | Price of bananas (1lb) | Price of electricity (1,000 kWh) | Price of a doctor’s visit | Cost of basket | CPI |
| 2019 | $0.57 | $120 | $80 | ||
| 2020 | $0.57 | $130 | $82 | ||
| 2021 | $0.62 | $140 | $85 |
To calculate the cost of basket students need to find the summation of the products in the basket using their respective weights e.g. to calculate the cost of basket for 2019:
25 * 0.57 + 12 * 120 + 5 * 80 = 1854.25
To calculate the CPI students need to divide the current cost of basket by the cost of basket in the base year and multiply the total by 100 e.g. to calculate the CPI for 2021:
2120.50 / 1854.25 * 100 = 114.36
| Year | Price of bananas (1lb) | Price of electricity (1,000 kWh) | Price of a doctor’s visit | Cost of basket | CPI |
| 2019 | $0.57 | $120 | $80 | $1854.25 | 100 |
| 2020 | $0.57 | $130 | $82 | $1984.25 | 107.01 |
| 2021 | $0.62 | $140 | $85 | $2120.50 | 114.36 |
Question 2
Calculate the rate of inflation for 2020 and 2021.
Rate of inflation = (current CPI – previous CPI) / previous CPI * 100
Rate of inflation (2020) = (107.01 – 100) / 100 * 100 = 7.01%
Rate of inflation (2021) = (114.36 – 107.01) / 107.01 * 100 = 6.87%
Author Profile
Latest entries
- May 4, 2023Student ResourcesIncome Elasticity of Demand (YED) Calculations
- March 27, 2023Real World ExamplesIBDP Real World Examples – Policies to Reduce Inequality
- March 27, 2023Real World ExamplesIBDP Real World Examples – Supply-side Policy
- March 27, 2023Real World ExamplesIBDP Real World Examples – Monetary Policy
Comments are closed