Final answer:
The Consumer Price Index (CPI) is calculated by dividing the updated cost of a fixed basket of goods and services by the base-period cost and then multiplying by 100 to create relative price indices.
Step-by-step explanation:
The Consumer Price Index (CPI) is a measure of overall price change over time for a fixed basket of goods and services. The CPI is calculated by taking the prices of individual items in the basket and multiplying them by their respective weights, which are based on the quantities that people buy, adjusting for substitution between goods and quality improvements. These product-level indices are then combined into indices for broader categories and, ultimately, into the overall CPI.
The method of calculation involves establishing a base year, which is set to an index value of 100. For the other periods, the formula takes the updated cost of the basket and divides it by the base-period cost, and then multiplies the result by 100. According to the information provided, the correct mathematical operation for calculating index numbers is updated cost divided by base-period cost and then multiplied by 100 (option 1).