Imagine in a simple economy consumers only consume 3 goods, as shown below with
ID: 1132133 • Letter: I
Question
Imagine in a simple economy consumers only consume 3 goods, as shown below with their prices in each year, and the economy-wide consumption in each year.
a) What is the percentage change in the price of marbles? Of sunglasses? And of fidget spinners? (3 marks)
b) From 2017 to 2018, did sunglasses become more or less expensive, relative to fidget spinners? (1 mark)
Use the 2017 quantities as the fixed basket of goods and services for the CPI calculations to follow.
c) Calculate CPI in 2017, using 2017 as the base year. (1 mark)
d) Calculate CPI in 2018, using 2017 as the base year. [1 mark]
e) Calculate the CPI rate of inflation between 2017 and 2018. [2 marks]
Suppose that between 2017 and 2018 all wages rose by exactly the inflation rate calculated above.
f) In 2018, would people be better off or worse off than in 2017? Or something else? Explain. [2 marks]
Year 2017 price 2017 quantity 2018 price 2018 quantity Marbles $10 100 $12 110 Sunglasses $125 10 $140 12 Fidget Spinners $4.50 200 $5 180Explanation / Answer
a) Percentage change in the price of marble = (Price in 2018 - Price in 2017)/Price in 2017 x 100
= (12 - 10)/10 x 100 = 20%
Percentage change in price of sunglasses = (140 - 125)/125 x 100 = 12%
Percentage change in the price of Fidget spinners = (5 - 4.5)/4.5 x 100 = 0.5/4.5 x 100 = 11.11%
b) Sunglasses become more expensive as compared to Fidget spinners because percentage increase in price of sunglasses is greater than that of fidget spinners.
c) CPI = Cost of basket in current year / Cost of basket in base year x 100
Cost of basket in current year i.e. 2017 = 10(100) + 125(10) + 4.5(200) = 1000 + 1250 + 900 = 3150
Base year is also 2017 so Cost of basket in base year = 3150
CPI in 2017 = 3150/3150 x 100 = 100
d) CPI in 2018 = Cost of basket in 2018/Cost of basket in 2017
Cost of basket in base year i.e. 2017 = 10(100) + 125(10) + 4.5(200) = 1000 + 1250 + 900 = 3150
Cost of basket in current year i.e. 2018 = 12(110) + 140(12) + 5(180) = 1320 + 1680 + 900 = 3900
CPI in 2018 = 3900/3150 x 100 = 123.81
e) Rate of inflation = (CPI in 2018 - CPI in 2017)/CPI in 2017 x 100 = (123.81 - 100)/100 x 100
= 23.81%
f) People will not be better off or worse off as their purchasing power remains same.