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Once the total cost of the fixed-quantity consumer basket has been determined for both the base year and the current year, the next step in the process is to calculate the Consumer Price Index (CPI). This calculation is performed using a specific formula that relates the cost of the basket in the current period to its cost in the base period.

Calculating the CPI Using Basket Costs

A price index, with the Consumer Price Index (CPI) being a prominent example, measures the relative change in the price of a basket of goods. It is calculated by dividing the basket's price in the current year by its price in a base year, then multiplying by 100. This standardizes the measure by setting the base year index value to 100, providing a clear point of reference for comparison. $$\text{Price Index} = \left(\frac{\text{Price of Basket in Current Year}}{\text{Price of Basket in Base Year}}\right) \times 100$$

Formula for a Price Index

Suppose the total cost of a fixed basket of consumer goods and services was $200 in the base year and $250 in the current year. Using this information, what is the value of the price index for the current year?

A country uses a fixed basket of goods to measure price changes, with Year 1 as the base year. The table below shows the total cost of this basket for three consecutive years. Based on this data, calculate the price index for Year 2 and Year 3, and determine during which period (from Year 1 to Year 2, or from Year 2 to Year 3) the cost of living increased at a faster rate. Explain your reasoning.

Analyzing Annual Price Changes

An economy's fixed consumer basket consists of 10 apples and 5 oranges. In the base year, apples cost $1.00 each and oranges cost $2.00 each. In the current year, the price of apples has risen to $1.50 and the price of oranges has risen to $2.20. What is the Consumer Price Index (CPI) for the current year?

Calculating CPI from Basket Data

A country's economic analysts determine that the total cost of a representative basket of consumer goods was $500 in the designated base year. In the following year, the total cost for the exact same basket of goods fell to $450. Based on this data, the price index for the following year would be greater than 100.

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