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Market Basket Price Index Analysis

The document contains a market basket analysis comparing the costs of various goods over three years. It shows that between year 1 and year 2, prices increased 25%, and between year 1 and year 3 prices increased 50%. When recalculating using year 2 as the base year, the price index between years 1 and 2 was 80, and between years 2 and 3 was 120. The document also uses the information to calculate real GDP and real GDP per capita for two years, finding slightly higher values in year 2 compared to year 1.

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Antonia Tascon Z.
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111 views3 pages

Market Basket Price Index Analysis

The document contains a market basket analysis comparing the costs of various goods over three years. It shows that between year 1 and year 2, prices increased 25%, and between year 1 and year 3 prices increased 50%. When recalculating using year 2 as the base year, the price index between years 1 and 2 was 80, and between years 2 and 3 was 120. The document also uses the information to calculate real GDP and real GDP per capita for two years, finding slightly higher values in year 2 compared to year 1.

Uploaded by

Antonia Tascon Z.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

6.

4 Problem Set

Basic Market Basket Year 1 Year 2 Year 3

Item No of Price Cost of Market Price Cost of market Price Cost of market
Units per unit basket per unit basket per unit basket

5.00
Bread 5 .50 2.50 1.00 5.00 1.00
loaves

4.00
Cheese 2 lbs 1.50 3.00 2.00 2.50 5.00

15.00
Blue jeans 1 pair 12 12.00 15.50 15.50 15.00

7.50
Gasoline 10 gals 1.25 12.50 .75 1.00 10.00

Textbook 1 book 10 10.00 18 18.00 25.00 25.00

$60.00
Total Expenditures $40.00 $50.00

1. Fill in the blanks in the table.


2. Choose year 1 as the base year. What is the price index for years 2 and 3?

year 1: ($40.00/$40.00)x100 = 100

Year 2: ($50.00/40.00)x100 = 125

Year 3: ($60.00/$40.00)x100 = 150


3. These index numbers indicate that there was a 25% increase in prices between year 1 and
year 2. What is the percentage increase between year 1 and year 3? What is the percentage
increase between year 2 and year 3?

Percentage increase between year 1 and 3: 50%

Percentage increase between year 2 and 3: 20%

4. Choosing year 2 as the base year, recalculate the indexes for years 1 and 3.

year 1: ($40.00/$50.00)x100 = 80

year 3: ($60.00/$50.00)x100 = 120

5. Would the price index number you computed be accurate if the quality of the goods in the
market basket changed? Explain.

No, when the quality of the products is changed, most of the times for the better, the
amount you will be paying will be higher, furthermore one will be paying more for the same
product, and not paying more for more, as a result of this the price index number will not be
accurate; it is hard to know when you are getting more or less for what you are paying.

Nominal and real GDP. For this question, use the following equation: rGDP = nGDP/Price Index x
100. Use the information in the table to answer the questions.

Nominal GDP Price Index Population

Year $5,000 125 11


1

Year $6,600 150 12


2

1. What is the real GDP for year 1?

5000 x (100/125) = 4000

2. What is the real GDP for year 2?

6600 x (100/150) = 4400

3. Using the formula: GDP per capita = real GDP/population, what is the real GDP per capita for
years 1 and 2?
year 1: 4000/11 = 363.63

year 2: 4400/12 = 366.67

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