Question

(a) What is the CPI in 2015, 2016, and 2017 if 2015 is the base year?

(b) What is the (CPI) inflation 2015-2016 and 2016-2017?

(c) How does CPI differ in 2015 and 2016 if 2016 is the base year?

(d) What effect does this have on your calculation of (CPI) inflation between 2015-

3. Suppose you are told that a basket of goods to calculate a consumer price index contains the following items: 4 apples and 2 bottles of water. The following table provides the prices of these goods in various years: Item Apple Water 2015 Price ($ per unit) 2016 Price ($ per unit) 2017 Price ($ per unit) 2 3 2 3 4 1 (a) What is the CPI in 2015, 2016, and 2017 if 2015 is the base year? (b) What is the (CPI) inflation 2015-2016 and 2016-2017? (c) How does CPI differ in 2015 and 2016 if 2016 is the base year? (d) What effect does this have on your calculation of (CPI) inflation between 2015- 2016?

Answer 1

a) The CPI can be estimated as follows:

For 2015:

Value of basket = (4 x 1) + (2 x 2) = $12

CPI = (12 / 12) x 100 = 100

For 2016:

Value of basket = (4 x 2) + (2 x 3) = $14

CPI = (14 / 12) x 100 = 116.67

For 2017:

Value of basket = (4 x 3) + (2 x 4) = $20

CPI = (20 / 12) x 100 = 166.67

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b) Inflation:

2015-16: (116.67 - 100 / 100) x 100 = 16.67%

2016-17: (166.67 - 116.67 / 116.67) x 100 = 42.86%

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c) The New CPI can be estimated as follows:

For 2015:

Value of basket = (4 x 1) + (2 x 2) = $12

CPI = (12 / 14) x 100 = 85.71

For 2016:

Value of basket = (4 x 2) + (2 x 3) = $14

CPI = (14 / 14) x 100 = 100

For 2017:

Value of basket = (4 x 3) + (2 x 4) = $20

CPI = (20 / 14) x 100 = 142.86

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d) Inflation:

2015-16: (100 - 85.71 / 85.71) x 100 = 16.67%

2016-17: (142.86 - 100 / 100) x 100 = 42.86%

Thus, there is no change in the calculated inflation rate due to the change in base year.