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

Aniyah Newman

Business

7 June, 20:45

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?

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Answers (1)

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Madelyn · 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