Suppose, in the base year, a typical market basket purchased...

Suppose, in the base year, a typical market basket purchased by an urban family cost $$\$ 250$$. In Year 1 , the same market basket cost $$\$ 950$$. What is the consumer price index (CPI) for Year 1 ? If the same market basket cost $$\$ 1,000$$ in Year 2, what is the CPI for Year 2? What was the Year 2 rate of inflation?

Key Concepts

Market Basket

The market basket refers to a fixed collection of goods and services selected to represent the typical consumption patterns of households. This basket is used to track price changes over time, ensuring that the CPI accurately reflects shifts in the cost of living.

Base Year

The base year is the designated reference period against which subsequent price changes are compared. In CPI computations, the cost of the market basket in the base year is generally normalized to 100, establishing a benchmark for comparing how much the price level has increased or decreased over time.

Consumer Price Index (CPI)

The CPI is a statistical measure that tracks changes in the average price level of a basket of goods and services purchased by households over time. It is typically calculated by dividing the cost of the market basket in a particular period by the cost in a base period and then multiplying by 100, allowing for the comparison of price levels across different time periods.

Inflation Rate

The inflation rate measures the rate at which the general level of prices for goods and services is rising, and consequently, how purchasing power is eroding over time. It is calculated by finding the percentage change in the CPI between two periods, typically by subtracting the earlier CPI from the later CPI, dividing the difference by the earlier CPI, and multiplying the result by 100.

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