Question

Assume prices increase by 20 percent from a base year in 2010 to 2011. the price index moves from 100 to 120 and therefore 1/120 x 100= _________ for the value (purchasing power of a dollar.

Answer 1

The purchasing power is the measurement of what a value of money can buy.
The purchasing power of a currency in a particular year is calculated by dividing the consumaer price index (CPI) of a base year by the CPI of the target rear and multiplying the result by 100.

Therefore, the purchasing power for 2011 using 2010 as a base year, when the CPI moved from 100 to 120 from 2010 to 2011 is given by:
Purchasing power = 100 / 120 x 100 = 0.8333 x 100 = 83.33%
Therefore, the purchasing power of 2011 relative to 2010 is 83.33%.