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CPI calculation

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Suppose the price index is 100 and a typical basket of goods and services cost $8. Within the basket, you had 4 hamburgers and 3 hot dogs. In 2001 the basket cost $100.00, 2002 the basket costs $175.00, 2003 the basket costs $250.00.

Name 4 weaknesses and 4 strengths in the CPI calculation. In addition, if the CPI is imperfect, why do we use it? Is the CPI calculation effective?

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Please find the attached solution.

Calulation of the Consumer Price Index
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Scenario,

Suppose the price index is 100 and a typical basket of goods and services cost $8. Within the basket, you had 4 hamburgers and 3 hot dogs. In 2001 the basket cost $100.00, 2002 the basket costs $175.00, 2003 the basket costs $250.00.

Name 4 weaknesses and 4 strengths in the CPI calculation. In addition, if the CPI is imperfect, why do we use it? Is the CPI calculation effective?

SOLUTION:

The percentage change in prices between any two periods can be calculated from the CPI using the following formula.

CPI = [(Current year Index number- Base year index number)/ Base year index number]*100

In 2001 the basket cost $100.00
2002 the basket costs $175.00
So the CPI for the year 2002 = [($175-$100)/$100] *100

=75%

So the CPI for the year 2003, = [($250-$100)/$100] *100

=150%

Strengths of CPI:

1. CPI is considered as an economic indicator. The CPI is the most widely used measure of inflation and is ...

Solution Summary

CPI calculation is evaluated.

$2.19