Question-3 (a): Define Consumer Price Index (CPI)? E xplain the steps involved i

Question

Question-3 (a): Define Consumer Price Index (CPI)? Explain the steps involved in computing Consumer Price Index?

(b) Cost of a basket of goods for three different years have been given in the table below as;

Cost of Basket of goods in

Cost of Basket of goods in

Cost of Basket of goods in

$ 750

$ 900

$ 915

1- Calculate CPI for the year 2014 and 2015                                                

2- How much prices have changed between the year 2014 and 2015

Cost of Basket of goods in

Cost of Basket of goods in

Cost of Basket of goods in

$ 750

$ 900

$ 915

Explanation / Answer

a.

CPI: This is the index number for evaluating the relative change in price of goods and services to be consumed in two different periods.

There are 4 steps:

1. Targeting the basket of goods and services of consumers. This could be done through the bureau of labor statistical report.

2. The prices of goods and services are to be found based on each time period.

3. The cost of each basket is to be calculated on each time period.

4. A base year should be selected for calculating the CPI. Suppose the base year price of a basket is $25. It increases to $30 in the current period. Therefore, the CPI would be (Current price / Base price) × 100 = ($30 / $25) × 100 = 120.

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