The British Office of National Statistics decides about the CPI basket of goods and assumes that...
The British Office of National Statistics decides about the CPI basket of goods and assumes that alcohol and tobacco account for almost 5% of total consumer expenditure in the UK.
a) With everything else the same, if the prices of alcohol and tobacco increase by 20%, by how much would the CPI increase?
b) Does the CPI correctly measure the true change in the cost of living of a British
Homework Answers
a ) An average consumer spends 5 pounds out of every 100 pounds on purchasing tobacco and alcohol. Now, 20% increase in 5 pounds is equal to 1 pound. Therefore, if everything else remains the same in the CPI basket, the CPI would increase by 1 from earlier 100 pounds to the new CPI 101 pounds. Thus, CPI increases by 1%.
b ) We can not say that CPI truly measures the true change in the cost of living of a British. Critics of CPI say that it overstates inflation by at least 1%. They say that CPI measures cost of living index, whereas earlier the CPI was used to measure inflation at different periods of time.
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The British Office of National Statistics decides about the CPI
basket of goods and assumes that...
The British Office of National Statistics decides about the CPI basket of goods and assumes that...
The British Office of National Statistics decides about the CPI basket of goods and assumes that alcohol and tobacco account for almost 5% of total consumer expenditure in the UK. a) With everything else the same, if the prices of alcohol and tobacco increase by 20%, by how much would the CPI increase? b) Does the CPI correctly measure the true change in the cost of living of a British
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