Question

The cost of the basket of goods in 2005 is $550 and the cost of the basket of goods in 2011 is $700. if 2005 is used as the base year, the price index for 2011 is

Answer 1

$127.27

Price index is (new year/old year)*100

If 2005 is the base/old year, then:

$700/550 = 1.27273 * 100 = $127.27

Price index is used to show inflation from year to year by the change in price for the same goods in a base year to current year. Price index for the base year compared to the base year will always be 100, so anything above that shows inflation.