Discuss the problems with the Consumer Price Index.    b) Consider a nation obsessed with Coke Studio. All they produce and consume are DVDs and karaoke mics, in the following amounts:   Karaoke Mics                                                   DVDs Quantity              Price                      Quantity             Price 2020                   10                 Rs.4,000                         30                 Rs.1,000 2021                   12                      6,000                         50                      1,200   Using a method similar to the CPI, compute the percentage change in the overall price level. Use 2020 as the base year and fix the basket at 3 DVDs and 1 karaoke mic.  Using a method similar to the GDP deflator, compute the percentage change in the overall price level. Again, use 2020 as the base year.  Is the inflation rate in 2021 the same using the two methods? Explain why or why not.

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A:

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Price Index Analysis

A price index is used to measure inflation in most countries and is focused on a collection of products and services significant to a particular economic segment. It is a measure of changing prices over some time. The price index is a scale or a valuable device to measure changes in price levels. The economists randomly choose a certain year as the base year to convert the amount spent on a basket into a price index.