Macroeconomics
The following diagram explains how a government constructs a Consumer Price Index.
Example of Calculating CPI and the Inflation Rate:
Assume that a typical household purchases the below quantities of three different commodities over two years: 2021 and 2022.
Table 1: Market Basket Details Commodity
Quantity in units
$ Price per unit in 2021 $ Price per unit in 2022
Food
6
10
8
Clothes
3
15
17
Entertainment
2
22
26
To calculate the percentage change inCPIandtheinflationratebetween2021and2022,weneedto follow these steps:
1. Identify a base year. Assume it is 2021 in this example.
2. Multiply each quantity by the unit price for both years:
Table 2: Calculating the Value of a Market Basket Commodity
Quantity × price per unit in 2021
Quantity × price per unit in 2022
Food
6 × 10 = 60
6 × 8 = 48
Clothes
3 × 15 = 45
3 × 17 = 51
Entertainment
2 × 22 = 44
2 × 26 = 52
3. Add the results of each year to obtain the market basket: Cost of market basket in 2021: 60 + 45 + 44 = 149 Cost of market basket in 2022: 48 + 51 + 52 = 151
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