Chapter 6, Problem 1VQP

To determine

Estimate the current year consumer price index (CPI).

Explanation of Solution

Consumer price index (CPI) can be calculated using the following formula:

$\text{Consumer price index}=\left(\frac{\text{Current year total expenditure}}{\text{Base year total expenditure}}\right)\times 100$        (1)

Current year consumer price index (CPI):

If the market basket consists of 10A and 20B with the current year prices of $2 and $4, respectively, and if the base year prices for A and B are $1 and $2.50, respectively, then the consumer price index can be calculated using Equation (1) as follows:

$\begin{array}{c}\text{Consumer price index}=\left(\frac{\left(10\times 2\right)+\left(20\times 4\right)}{\left(10\times 1\right)\left(20\times 2.5\right)}\right)\times 100\\ =\left(\frac{20+80}{10+50}\right)\times 100\\ =1.67\times 100\\ =167\end{array}$

Thus, the value of the current year consumer price index (CPI) is 167.