Consider the following table for the economy of a nation who

Consider the following table for the economy of a nation whose residents produce four final goods Assume 2018 as the base year. Calculate the price index for 2017 98.8. (Enter your response rounded to one decimal place )

Solution

In computing price index (assuming it is Consumer Price Indx, CPI), we only consider the base year (2018) quantities for both years.

Cost of purchasing this basket of goods in 2018 = 17 x $748 + 943 x $11 + 318 x $158 + 10,589 x $2

= $(12,716 + 10,373 + 50,244 + 21,178) = $94,511

Cost of purchasing this basket of goods in 2017 = 17 x $1,021 + 943 x $6 + 318 x $91 + 10,589 x $1

= $(17,357 + 5,658 + 28,938 + 10,589) = $62,542

Price index = $62,542 / $94,511 x 100 = 66.2

NOTE: If by Price index this question means GDP Deflator (which is ratio of Nominal GDP to real GDP), the answer will be different.