Question

Consider a simple economy where the basket of goods used to calculate the CPI contains two items: shirts and pants. The basket consists of 3 shirts and 2 pairs of pants. Each item increases in price by $1 in year 2. The pants price is 20$ and the shirt price is 25$. What is the CPI for year 2.

Answer 1

To calculate the CPI for year 2, first determine the total cost of the basket in the base year and in year 2 after the price increase. Then, use the CPI formula to obtain a year 2 CPI of 104.35.

Step-by-step explanation:

To calculate the Consumer Price Index (CPI) for year 2 in the provided simple economy, we will follow these steps:

1. Calculate the total cost of the basket in year 1 using the original prices provided.
2. Calculate the total cost of the basket in year 2 after the price increase.
3. Use the formula for CPI, which is (Cost in Current Year / Cost in Base Year) × 100.

Now let's calculate the total cost for each year:

• Year 1 (Base Year): (3 shirts × $25) + (2 pants × $20) = $75 + $40 = $115
• Year 2 (Current Year): (3 shirts × $26) + (2 pants × $21) = $78 + $42 = $120

Next, we calculate the CPI for year 2:

CPI for Year 2 = ($120 / $115) × 100 = 104.35

Therefore, the CPI for year 2 is 104.35, indicating a rise in the level of prices compared to the base year.