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Suppose that consumers purchase lettuce and computer chips
Suppose that consumers purchase lettuce and computer chips. In 2010, one pound of lettuce costs $1, a computer chip costs $1, and the typical consumer buys 10 pounds of lettuce and 10 computer chips. In 2011, one pound of lettuce costs $2, a computer chip costs $0.50, and the typical consumer buys 5 pounds of lettuce and 20 computer chips. In 2012, one pound of lettuce costs $2.10, a computer chip costs $0.90, and the typical consumer buys 12 pounds of lettuce and 20 computer chips. Using 2010 as the base year, the inflation rate between 2012 and 2011 is _____ percent.
The answer is reportedly 20 percent but how?
Expert Solution
|
2010 (Base Year) |
2011 |
2012 |
|||||||
|
Commodity |
Q |
P |
QXP |
Q1 |
P1 |
QxP1 |
Q2 |
P2 |
QXP2 |
|
COMPUTER |
10 |
1 |
10 |
20 |
0.5 |
5 |
20 |
0.9 |
9 |
|
LETTUCE |
10 |
1 |
10 |
5 |
2 |
20 |
12 |
2.1 |
21 |
|
Total |
20 |
25 |
30 |
||||||
|
CPI |
100 |
125 |
150 |
||||||
2010 is base year therefore 2010 commodity basket is taken for calculating Consumer Price index (CPI) for all years.
CPI for a current year = (Product of Base Year quantity and current year prices / Product of Base Year Quantity and Base Year Prices ) X 100
Inflation rate between 2012 & 2011 = (CPI difference between 2012 and 2011 / CPI for 2011 ) /100
=(150-125)/125 X100 = 20%
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