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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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    Calulation of the Consumer Price Index
    ________________________________________
    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