You are given the following table of prices: Item Price in 2013 Price in 2014 1
ID: 1167419 • Letter: Y
Question
You are given the following table of prices:
Item
Price in 2013
Price in 2014
1 Loaf of Bread
$ 1.00
$ 1.50
1 Pound of Chicken
$ 6.25
$ 7.00
1 Gallon of Milk
$ 2.00
$ 3.00
1 Gallon of Gasoline
$ 3.00
$ 2.80
1 year of cable (TV and Internet)
$ 840.00
$ 960.00
1 Pair of Jeans
$ 50.00
$ 60.00
1 year of Rent for Apartment
$ 8,400.00
$ 9,000.00
In order to represent the purchases of the average consumer throughout the year, the government uses the following market basket:
52 loaves of bread, 30 pounds of chicken, 35 gallons of milk, 416 gallons of gasoline, 1 year of cable, 12 pairs of jeans, 1 year of rent for apartment.
a.Calculate the cost of the market basket in 2013 and the cost of the market basket in 2014.
b.Using 2013 as the base year, calculate the CPI for 2013 and 2014.
c.Calculate the CPI inflation rate between 2013 and 2014.
d.Now suppose the nominal wage of an individual for 2013 and 2014 is given as follows:
Year
Nominal Wage
2013
$ 56.00
2014
$ 60.00
(i)What is the percentage change in the nominal wage between 2013 and 2014?
(ii)Calculate the real wage for both years in 2013 dollars (i.e. using 2013 as the base year).
(iii)What is the percentage change in the real wage between 2013 and 2014?
(iv)Has the purchasing power of the worker increased or decreased between 2013 and 2014? Explain how you know this (using a previous calculation from above).
Item
Price in 2013
Price in 2014
1 Loaf of Bread
$ 1.00
$ 1.50
1 Pound of Chicken
$ 6.25
$ 7.00
1 Gallon of Milk
$ 2.00
$ 3.00
1 Gallon of Gasoline
$ 3.00
$ 2.80
1 year of cable (TV and Internet)
$ 840.00
$ 960.00
1 Pair of Jeans
$ 50.00
$ 60.00
1 year of Rent for Apartment
$ 8,400.00
$ 9,000.00
Explanation / Answer
a.
Total cost of the basket is $11,398 in 2013 and $12,238 in 2014
b. CPI = Cost of basket in current year/Cost of basket in base year * 100
CPI in 2013 = 11398/11398 * 100 = 100
CPI in 2014 = 12238/11398 * 100 = 107.37
c. Inflation = (CPI in current year - CPI in base year)/CPI in base year * 100
Inflation between 2013 and 2014 = (107.37-100)/100 * 100 = 7.37%
d.
i. % change in nominal wage = (60 - 56)/56 * 100 = 7.14%
ii. Real wage = Nominal Wage/(1+inflation rate)
real wage in 2013 = 56/(1+0%) = 56
real wage in 2014 = 60/(1+7.37%) = 55.80
iii. % change = (55.80 - 56)/56 *100 = -0.21%
iv. The Purchasing power has decreased by 0.21% as the inflation rate is higher than the nominal wage increase and the real wage increase is negative.
Item Price in 2013 Price in 2014 Quantity in Basket Cost of the quantiity in 2013 Cost of the quantiity in 2014 1 Loaf of Bread $ 1.00 $ 1.50 52 $ 52 $ 78 1 Pound of Chicken $ 6.25 $ 7.00 30 $ 188 $ 210 1 Gallon of Milk $ 2.00 $ 3.00 35 $ 70 $ 105 1 Gallon of Gasoline $ 3.00 $ 2.80 416 $ 1,248 $ 1,165 1 year of cable (TV and Internet) $ 840.00 $ 960.00 1 $ 840 $ 960 1 Pair of Jeans $ 50.00 $ 60.00 12 $ 600 $ 720 1 year of Rent for Apartment $ 8,400.00 $ 9,000.00 1 $ 8,400 $ 9,000 Total Cost $ 11,398 $ 12,238Related Questions
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