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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