In a simple economy people consume only 2 goods food and clo

In a simple economy, people consume only 2 goods, food and clothing. The market basket of goods used to compute the CPI consists of 50 units of food and 10 units of clothing.

Food

Clothing

2002 price per unit

$4

$10

2003 price per unit

What is the percentage increase in the CPI?

$6

$20

Solution

Calculation of CPI

Year

Food

Clothing

Total

Price

Total

Price

Total

2002

$4

$200

$10

$100

200 + 100 = $300

2003

$6

$300

$20

$200

300+200 = $500

CPI for 2002 = ($300 / $300) × 100 = 100%

CPI for 2003 = ($500 / $300) × 100 = 166.66%

Answer: Percentage increase is (166.66% - 100% =) 66.66%.