Suppose an Economy Consumes Only Two Goods: Food and Clothing

Essay

Suppose an economy consumes only two goods: food and clothing. The following table shows quantities consumed and prices for three years: Year 0 (the base year), Year 1, and Year 2.
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a) If the CPI basket is the Year 0 one, compute the expenditure on the basket in years 0, 1, and 2.
b) Compute the CPIs in years 1 and 2, with Year 0 being the base year.
c) For Year 0, compute the shares in expenditure of each of the two goods. Check that the sum of the two shares equals 1. If you multiply those shares by 100, we call them weights. Using the weights, calculate the CPI for Year 0. It should be equal to 100.
d) Using the weights, re-calculate the CPIs for the next two years and compare your result with that in part
b.