The data show that the (nominal) price of butter was $1 in 2000.

The consumer price index (CPI) was 100 and 105 in 2000 and 2005, respectively.
It increased to $2 in 2005.
2000 2010
CPI 100 105 110
Price of butter $1 $2.5
2005
$2
We want to calculate the Real Price of butter in 2005 (with 2000 prices)
Since you calculate this with 2000 prices, the CPI of 2000 goes to the numerator
Real Price in 2005 = ?
CPI 2000
CPI 2005
The denominator must be the CPI of 2005
After dividing them, multiply the result with the Nominal Price of butter in 2005.
x (Price 2005)
100
105
=
x 2
So, the Real Price of butter in 2005 is $1.90 (with 2000 prices).
= 1.90
In other words, butter was more expensive in 2005 than 2000.
2000 2010
CPI 100 105 110
Price of butter $1 $2.5
2005
$2
Note: The prices will not always rise during time. Please see section 1.3, page 12 in the
textbook.