Imagine that you calculate the inflation rate of some economy using the CPI. You get that inflation in 2008 was 22.4%, in 2009 was 12.5% and in 2010 was 3.9%. For your method you used 2010 as the base year, but your friend (who is a mathematical genius) tells you that your calculations would be more accurate if you used as base year 2008. What will be true about these new calculations?

Question

Business

Lyric Bernard

31 January, 23:09

Imagine that you calculate the inflation rate of some economy using the CPI. You get that inflation in 2008 was 22.4%, in 2009 was 12.5% and in 2010 was 3.9%. For your method you used 2010 as the base year, but your friend (who is a mathematical genius) tells you that your calculations would be more accurate if you used as base year 2008. What will be true about these new calculations?

+2

Answers (1)

Know the Answer?

Quinn Salas · Answer 1

The calculation will be more accurate, because the base year is the oldest.

CPI is calculated as

(P_n / P_base - 1) * 100

as:

P_n prices at time n

The mathematical reason why it is better to take the oldest year is that % growth works better