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Analyzing an Incorrect Price Index Calculation
An economics student is calculating a price index for an economy that consumes only two goods: apples and bananas. The student has collected the following data:
- Base Year: 10 apples at $1 each, 20 bananas at $0.50 each.
- Current Year: 12 apples at $1.20 each, 25 bananas at $0.60 each.
The student calculates the price index for the Current Year as follows:
- Cost of basket in Current Year = (12 apples * $1.20) + (25 bananas * $0.60) = $29.40
- Cost of basket in Base Year = (10 apples * $1.00) + (20 bananas * $0.50) = $20.00
- Price Index = ($29.40 / $20.00) * 100 = 147
Identify the fundamental error in the student's calculation of the 'Cost of basket in Current Year' and explain why this error violates the core principle of a fixed-basket price index.
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Economics
Economy
Introduction to Macroeconomics Course
Ch.4 Inflation and unemployment - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
CORE Econ
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Empirical Science
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Analysis in Bloom's Taxonomy
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An economy's fixed basket of goods consists of 20 apples and 10 bananas. The table below shows the price of these goods over three years. Using Year 1 as the base year, match each year to its correct price index.
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