1. List the three largest categories that make up the market basket that is used to compute CPI.
According to Figure 1 in our textbook, there are many categories that make up the market basket used to calculate CPI. They are Housing, Transportation, Food and beverages, Medical care, Recreation, Education and communication, Apparel, and other. The three largest categories consist of Housing at 43%, Transportation at 17% and Food and beverages at 15%. These three combined make up 65% of the market basket, so majority of the basket includes these three categories.
2. Suppose the market basket of goods and services purchased by an average urban household consists of only X, Y, Z, three consumer products. Calculate the CPIs for each year and the inflation rate for the Year 1-Year 2 period.
There are 5 steps to calculate the CPI. The first is to fix the basket. Then, you find the prices of the items in your basket. Third, you compute the baskets cost. Then, you use the formula: 100x (cost of cost of basket in current year/cost of basket in base year). Once you find the CPI, you find inflation using the formula: 100x ((CPI this year-CPI last year)/(CPI last year)) For Year One, to calculate the baskets cost, you would do the Price of X times the quantity of X plus the Price of Y times the Quantity of Y plus the Price of Z times the Quantity of Z. (1x2) + (3x1) + (2x3)= 11. Then, enter this number into the formula. I’m assuming year one is the base year, so (11/11) x 100= 100. This would be the CPI for Year One. For Year Two, you repeat these steps:
(2x2) + (6x1) + (1x3)= 13. Then, you plug this into the formula. (13/11) x 100= 118.18. This is the CPI for Year Two. You then find the inflation rate by plugging the two CPIs into the formula. ((118.18-100)/(100)) x 100= 18.18% or 18% rounded. This means the inflation rate for the Year One-Year Two Period is approximately 18 percent.
3. If the CPI was 130.7 in 1990 and was 136.2 in 1991, compute the rate of...
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