Question

Suppose that the residents of Vegi-Topia spend all of their income on cauliflower, broccoli, and carrots. In 2013, they buy 50 heads of cauliflower for $2 each, 60 bunches of broccoli for $1.5 each, and 200 carrots for $0.10. In 2014, they buy 75 heads of cauliflower for $2 each, 70 bunches of broccoli for $1.50 each, and 500 carrots for $0.20 each. In 2015, they buy 80 heads of cauliflower for $3, 90 bunches of broccoli for $2, and 500 carrots for $0.25 each. If the base year is 2015, what is the inflation for 2014

Answer 1

Inflation for 2014 is 11%

Step-by-step explanation:

Inflation refers to a quantitative measure of the rate of an increase in the average price level of a selected basket of commodities in an economy over a specified period of time.

The inflation rate for 2014 can be calculated as follows:

Since 2015 is the base year, the it implies that the basket we are going to use contains 80 heads of cauliflower, 90 bunches of broccoli, and 500 carrots.

Therefore, cost of basket for each year can be determined as follows:

2013 cost of basket = ∑(Unit price in 2014 * Quantity in 2015) = ($2 * 80) + ($1.50 * 50) + ($0.10 * 500) = $285

2014 cost of basket = ∑(Unit price in 2014 * Quantity in 2015) = ($2 * 80) + ($1.50 * 50) + ($0.20 * 500) = $335

2015 cost of basket = ∑(Unit price in 2015 * Quantity in 2015) = ($3 * 80) + ($2 * 50) + ($0.25 * 500) = $465

The CPI for each year can be determined using the following for formula:

CPI of a year = Current period cost of basket / Base year cost of basket …………… (1)

As 2015 is the base year, using equation (1), we have:

2013 CPI = (2013 cost of basket / 2015 cost of basket) * 100 = $285 / $465 = 0.61 * 100 = 61

2014 CPI = (2014 cost of basket / 2015 cost of basket) * 100 = $335 / $465 = 0.72 * 100 = 72

2015 CPI = (2015 cost of basket / 2015 cost of basket) * 100 = $465 / $465 = 1 * 100 = 100

The inflation for a year can be determined as follows:

Inflation = (CPI in the current year - CPI in previous year) / CPI in the base year ..................... (2)

Using equation (2), we have:

Inflation for 2014 = (CPI in 2014 - CPI in 2013) / CPI in 2015 = (72 - 61) / 100 = 11 / 100 = 0.11, or 11%