Aplia Calculating Inflation Using a Simple Price Index

1. Calculating inflation using а simple price lndex Consider а fictional price index, the Canadian Student Price lndex {CSPI), based on а typical university student's annual purchases. Suppose the fotlowlng tаЫе shows lnformatlon оп the market Ьasket for the CSPI and the price.s of each of the ooods in 2013, 2014, and 2015. Тhе cost of each ltem in the basket and the total cost of the basket are shown for 201 З. Perform these s.эme ca/culatJons lor 2014 and 2015, and enter the resufts ,п the lo/fowing tаЬ/е. 2013 Quantity ln Bask@t Notebooks Prlc@ Cost Price Cost (Dollllгs) (Dollllrs) (Dollaгs) (Dollars) (DollllrS) (Dollars) 20 50 50 Larg@ coffe@s 200 200 En@rgy drlnks 100 200 Text.Ьooks 10 201S Cost 10 Calculators 2014 Price 10{) Total cost 1,000 1,470 Prk@ ind@x 100 �,( 54 120 �,( 75 Oo::::J,t � c:Joo::J,t � �,( � �,( 150 �,( � Explanation: � � �,( Points:-1/1 Close Explanation ,.,, For each good in the basket, multiply price Ьу quantity to calculate expenditure on that good. For example, in 2014, the price of а notebook was Sl per noteЬook, and 10 were consumed; therefore, the cost of this ltem ln the basket was Slperr101ebook х 10 ,,oteЬooks= $10. Тhen add expenditures on the different goods to get the basket's tota1 cost: Cos10/Bask.�1 in 2014 = Cos1N°"ьoo1;s+Costc111мn/Of'J+ ostи1r,rCqff,n+Cos1eм,.,,DrinЬ+Co.)tт�,Ьoo-Ь • SIO+S54+$200+SЗOO+Sl.200 = $1.764 You сап use simllar calculatlons to determine that the cost of the basket in 2015 is $2,205. Suppose the base year for this price index is 2013. In rhe fast row of the tаЫе, calcuJate and eлter the value of the CSPI for the remaining years. Consider a fictional price index, the Canadian Student Price Index (CSPI), based on a typical university student's annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2013, 2014, and 2015. The cost of each item in the basket and the total cost of the basket are shown for 2013. Perform these same calculations for 2014 and 2015, and enter the results in the following table. 2013 2015 Price Cost Price Cost Price Cost y in (Dollars (Dollars (Dollars (Dollars (Dollars (Dollars ) Basket Notebook 2014 Quantit ) ) 10 2 20 1 1 50 50 54 200 1 200 1 100 2 200 3 10 100 1,000 120 ) 10 ) 3 ) 30 s Calculator 54 75 75 s Large 200 1 200 coffees Energy 300 4 400 drinks Textbooks Total cost 1,470 Price 100 1,200 150 1,500 1,764 2,205 120 150 index Points: 1/1 Close Explanation Explanation: For each good in the basket, multiply price by quantity to calculate expenditure on that good. For example, in 2014, the price of a notebook was $1 per notebook, and 10 were consumed; therefore, the cost of this item in the basket was . Then add expenditures on the different goods to get the basket's total cost: You can use similar calculations to determine that the cost of the basket in 2015 is $2,205. Suppose the base year for this price index is 2013. In the last row of the table, calculate and enter the value of the CSPI for the remaining years. Close Explanation Explanation: A price index is the cost of the market basket in the current year divided by the cost of the market basket in the base year, all multipled by 100. In 2013, the CSPI must be 100 because 2013 is the base year, so you're just dividing the market basket by itself and multiplying by 100. In 2014, you can calculate the CSPI in the following way: Similarly, in 2015 the CSPI is 150: Between 2013 and 2014, the CSPI increased by 20% . Between 2014 and 2015, the CSPI increased by 25% . Points: 1/1 Close Explanation Explanation: You can calculate the percentage change in the CSPI between 2013 and 2014 in the following way: Using similar calculations, you can find the inflation rate in the CSPI between 2014 and 2015: Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to university? Check all that apply. As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers. A new mobile device for personal computing became available for purchase. Professors required each student to buy 10 notebooks, regardless of the price. Energy drinks became increasingly popular on university campuses between 2013 and 2015 due to significant improvements in flavour. Points: 0.75 / 1 Close Explanation Explanation: One reason that price indexes such as the CSPI overstate inflation is that they use a fixed basket of goods. In reality, when the price of a good increases, people tend to buy less of it. For example, during the period shown in this problem, the price of calculators rose dramatically, but if the characteristics of all the goods were held constant, you would expect students to buy fewer calculators as a result. Therefore, a measure of inflation that assumes that students would not reduce their consumption of calculators, even as their price rose, would overstate inflation. However, if students cannot alter their bundle—for example, because professors require them to buy 10 notebooks, regardless of the price—then the CSPI would be a more accurate description of the true cost of attending university. Another reason that price indexes overstate inflation is that they assume the quality of a good doesn't change from year to year. Therefore, if the price of something increases because of increases in quality, the price index would overstate the cost increase of that item. For example, it's reasonable to think that part of the price increase of the energy drinks was payment for the new improved flavour, not an increase in the price of the same energy drinks that were sold in 2013. Yet another reason that price indexes overstate inflation is that they don't account for the benefits of new goods. When new goods, like new mobile devices for personal computing, are introduced, consumers can spend their money on more things. As a result, the value of each dollar they have increases. Because the CSPI doesn't account for new goods, it underestimates what a dollar is worth when new goods are introduced and, thus, overestimates inflation.