Question

An economy has only three goods in it. During one year good A rises in price by 10 per cent, good $B$ by 20 per cent and the price of good $C$ is unchanged. Consumers spend half their income on good A, 20 per cent of it on good B and the other 30 per cent on good C. Calculate the inflation rate for this economy during the year.

   An economy has only three goods in it. During one year good A rises in price by 10 per cent, good $B$ by 20 per cent and the price of good $C$ is unchanged. Consumers spend half their income on good A, 20 per cent of it on good B and the other 30 per cent on good C. Calculate the inflation rate for this economy during the year.

Economics Theory in Action

Ken Heather 4th Edition

Chapter 15, Problem 2

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- Consumers spend 50% of their income on good A. - Consumers spend 20% of their income on good B. - Consumers spend 30% of their income on good C. Show more…

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An economy has only three goods in it. During one year good A rises in price by 10 per cent, good $B$ by 20 per cent and the price of good $C$ is unchanged. Consumers spend half their income on good A, 20 per cent of it on good B and the other 30 per cent on good C. Calculate the inflation rate for this economy during the year.

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Key Concepts

Inflation Rate

This is the measure of the overall percentage increase in prices in an economy over a given period. It reflects how much more consumers are paying on average for a fixed set of goods and services compared to a previous time period.

Consumer Price Index (CPI)

The CPI is a statistical measure that tracks the price changes in a basket of goods and services typically purchased by households. It involves aggregating the prices of various items, each weighted by its importance in consumer spending, to arrive at a single index number that reflects overall price level changes.

Weighted Average Calculation

This concept refers to the method of computing an overall average that accounts for the relative significance or contribution of different components. In calculating inflation, each good’s price change is multiplied by its expenditure share, ensuring that changes in goods with higher spending weights have a greater influence on the overall inflation rate.

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