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Cognate Strategies

Department of Business Administration: University of the People

BUS 1104 - 01: Written Assignment Unit 3

November 22, 2023

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Introduction

Inflation has significant impacts on the economy, and as a result, it is essential to

understand how it is calculated. This paper aims to demonstrate how to calculate total

expenditure, consumer price index (CPI), and inflation rate using the provided production items

table.

Production Items
Base Year Price
Product Quantity Price (2021) Price (2022)
(2011)
Burritos 10 $1.00 $1.50 $1.75
Flashlights 15 5.00 7.00 6.75
Golf Balls 8 2.00 3.00 3.50

Total Expenditure

Total expenditure is the sum of the quantities of each good multiplied by their respective prices

(Greenlaw & Shapiro,. 2017).

Therefore, the total expenditure for 2021 is calculated as follows:

Burritos: 10 x $1.50 = $15.00

Flashlights: 15 x $7.00 = $105.00

Golf Balls: 8 x $3.00 = $24.00

Total expenditure in 2021: $144.00

Likewise, the total expenditure for 2022 is obtained by multiplying the quantities of each good
by their respective prices as follows:

Burritos: 10 x $1.75 = $17.50

Flashlights: 15 x $6.75 = $101.25

Golf Balls: 8 x $3.50 = $28.00

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Total expenditure in 2022: $146.75

Consumer Price Index (CPI)

CPI measures the average change in prices consumers pay for goods and services over

time relative to a base year. Calculating CPI involves dividing the current year's total expenditure

by the base year's total expenditure and then multiplying by 100 (Fernando, 2023). In this case,

2011 is the base year.

The calculation of CPI for 2021 is as follows:

CPI (2021) = (total expenditure in 2021/total expenditure in 2011) x 100

= ($144.00/$53.00) x 100

= 271.70

And again, I can calculate CPI for 2022 as follows:

CPI (2022) = (total expenditure in 2022/total expenditure in 2011) x 100

= ($146.75/$53.00) x 100

= 276.89

Rate of Inflation

The rate of inflation for a given period is the percentage increase in the CPI between that

period and the previous one (EconPort, Calculating Inflation With Price Indexes, n.d.).

Therefore, to calculate the rate of inflation for 2022, we use the following formula:

Inflation rate = (CPI 2022 - CPI 2021)/CPI 2021 x 100

Substituting the values we have calculated, the inflation rate for 2022 is:

Inflation rate = (276.89 minus 271.70)/271.70 x 100

= 1.92%
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Conclusion

Now I have demonstrated how to calculate total expenditure, CPI, and the rate of

inflation using the provided production item table. The calculations show that the CPI increased

from 271.70 in 2021 to 276.89 in 2022, indicating an inflation rate of 1.92%. Such calculations

are critical in understanding the effect of inflation on an economy, which is useful for policy-

making and other relevant economic decisions.

References

Greenlaw, S. & Shapiro, D. (2017). 9. Inflation. In Principals of Macroeconomics 2e. Openstax.

https://openstax.org/details/books/principles-macroeconomics-2e

Fernando, J. (2023, August 11). Consumer Price Index (CPI) Explained: What It Is and How It's

Used. Investopedia. https://www.investopedia.com/terms/c/consumerpriceindex.asp

EconPort - Calculating Inflation with Price Indexes. (n.d.).

https://www.econport.org/content/handbook/Inflation/Price-Index/CalcwPI.html
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Word Count [585]

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References