For example - For example let's compute the CPI for Country...

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Unformatted text preview: For example, let's compute the CPI for Country B. In this simplified example, consumers in Country B only purchase bananas and backrubs (lucky fools). The first step is to fix the basket of goods. The typical consumer in Country B purchases 5 bananas and 2 backrubs in a given period of time, so our fixed basket is 5 bananas and 2 backrubs. The second step is to find the prices of these items for each time period. This data is reported in the table, above. The third step is to compute the basket's cost for each time period. In time period 1 the fixed basket costs (5 X $1) + (2 X $6) = $17. In time period 2 the fixed basket costs (5 X $2) + (2 X $7) = $24. In time period 3 the fixed basket costs (5 X $3) + (2 X $8) = $31. The fourth step is to choose a base year and to compute the CPI. Since any year can serve as the base year, let's choose time period 1. The CPI for CPI....
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