Fresh fruit price and quantity data for the years 1988 and...

Fresh fruit price and quantity data for the years 1988 and 2007 follow (Census Bureau website, March 19,2009 ). Quantity data reflect per capita consumption in pounds and prices are per pound. $$\begin{array}{lccc} & \text { 1988 per Capita } & \text { 1988 Price } & \text { 2007 Price } \\ \text { Fruit } & \text { Consumption (pounds) } & \text { (\$/pound) } & \text { (\$/pound) } \\ \text { Bananas } & 24.3 & .41 & .53 \\ \text { Apples } & 19.9 & .71 & 1.12 \\ \text { Oranges } & 13.9 & .56 & .91 \\ \text { Pears } & 3.2 & .64 & 1.27 \end{array}$$ a. Compute a price relative for each product. b. Compute a weighted aggregate price index for fruit products. Comment on the change in fruit prices over the 19 -year period.

Fresh fruit price and quantity data for the years 1988 and 2007 follow (Census Bureau website, March 19,2009 ). Quantity data reflect per capita consumption in pounds and prices are per pound.
$$\begin{array}{lccc}
& \text { 1988 per Capita } & \text { 1988 Price } & \text { 2007 Price } \\
\text { Fruit } & \text { Consumption (pounds) } & \text { (\$/pound) } & \text { (\$/pound) } \\
\text { Bananas } & 24.3 & .41 & .53 \\
\text { Apples } & 19.9 & .71 & 1.12 \\
\text { Oranges } & 13.9 & .56 & .91 \\
\text { Pears } & 3.2 & .64 & 1.27
\end{array}$$
a. Compute a price relative for each product.
b. Compute a weighted aggregate price index for fruit products. Comment on the change in fruit prices over the 19 -year period.

Key Concepts

Base Period and Weights

The concept of a base period is central in index number construction. In such indices, quantities or expenditure shares from the base period are used as weights to reflect the relative importance of each good. This application of weights provides a consistent reference point that helps to isolate real price changes over time.

Price Relative

A price relative is a ratio that compares the price of a good in one period to its price in a base period. It measures how much the price has changed over time, often expressed as a percentage or a multiplier, and is used to analyze inflation or other price movement trends.

Weighted Aggregate Price Index

A weighted aggregate price index is a composite measure that calculates the overall change in prices for a group of goods by assigning different weights to each item based on its relative importance or share of consumption. This ensures that items with larger economic significance have a greater impact on the index, leading to a more accurate representation of overall price changes.

Index Interpretation

Interpreting a price index involves comparing the computed index value to the base value, which is typically set to 100 or 1. An index value above this level indicates an increase in the overall price level, while a value below indicates a decrease. This method of interpretation is fundamental in economic analysis for understanding inflation or deflation trends.

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