In 1997, the price of a particular basket of goods was $2,900. In 1998, the price of the same basket was $3,300. In 1996, the base year, the price of the basket was $2,500. (Hint: price index is price indexed to a base year.)
A. Calculate price index for 1996, 1997, and 1998.
B. Calculate inflation rates for 1996-97 and 1997-98. Is inflation increasing or decreasing
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http://www.inflationdata.com/inflation/Inflation_Articles/CalculateInflation.asp
As to whether inflation is increasing or decreasing, if the cost of the same basket of goods costs more than the year before, and more again in the next year, do you think the rate of inflation is going up or down?
Economic
To calculate the price index, we need to use the formula:
Price Index = (Price in the given year / Price in the base year) * 100
A.
1. For 1996, since it is the base year, the price index would be 100.
2. For 1997:
Price Index in 1997 = (Price in 1997 / Price in base year) * 100
= ($2,900 / $2,500) * 100
= 116
3. For 1998:
Price Index in 1998 = (Price in 1998 / Price in base year) * 100
= ($3,300 / $2,500) * 100
= 132
B.
To calculate the inflation rate, we use the formula:
Inflation Rate = (Price Index in the second year - Price Index in the first year) / Price Index in the first year * 100
1. For the inflation rate in 1996-1997:
Inflation Rate 1996-1997 = (Price Index in 1997 - Price Index in 1996) / Price Index in 1996 * 100
= (116 - 100) / 100 * 100
= 16%
2. For the inflation rate in 1997-1998:
Inflation Rate 1997-1998 = (Price Index in 1998 - Price Index in 1997) / Price Index in 1997 * 100
= (132 - 116) / 116 * 100
= 13.8%
Based on the results, the inflation rate is increasing from 1996-1997 to 1997-1998.