Question

assume that an economy produces just two goods, x and y, as shown in the table above. if year 1 is the base year, the consumer price index for year 2 in this economy is

Answer 1

The Consumer Price Index (CPI) for year 2 is calculated by comparing the total cost of a fixed basket of goods and services in year 2 to the cost in the base year (year 1), and then converting this cost into an index number by multiplying by 100.

Step-by-step explanation:

The Consumer Price Index (CPI) is a measure used to calculate inflation, which reflects the average change in prices over time for a basket of goods and services. When economists calculate the CPI, they select a base year as a reference point, often represented with an index number of 100. To determine the CPI for another year, one could compare the total cost of the basket in that year to the cost in the base year. The calculation of the CPI for year 2 would involve summing the cost of the basket in year 2, dividing by the cost of the basket in the base year (year 1, here), and then multiplying by 100. If the index number for year 2 is higher than 100, it indicates inflation has occurred. For instance, if the index for year 2 is 105, this shows a 5% inflation rate since the base year.