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f the price of a market basket of goods in year 1 is $10 and $12 in year 3 and the base year is year 1, the price index for year 3 is

Question

If the price of a market basket of goods in year 1 is 10and10 and 12 in year 3 and the base year is year 1, the price index for year 3 is

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Solution

The price index for a given year is calculated by taking the price of the market basket of goods for that year and dividing it by the price of the same basket in the base year, then multiplying the result by 100 to get a percentage.

Here's how you can calculate it:

  1. Identify the price of the basket of goods in the year of interest (year 3 in this case), which is $12.

  2. Identify the price of the same basket of goods in the base year (year 1 in this case), which is $10.

  3. Divide the price in the year of interest by the price in the base year: 12/12 / 10 = 1.2

  4. Multiply the result by 100 to get a percentage: 1.2 * 100 = 120

So, the price index for year 3 is 120. This means that the price of the market basket of goods has increased by 20% from year 1 to year 3.

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