Assume an economy which is producing only one product.Output and price data for a three-year period are as follows.

-Refer to the above data.If year 2 is chosen as the base year,the price index for year one is:

Question

Assume an economy which is producing only one product.Output and price data for a three-year period are as follows.
 
-Refer to the above data.If year 2 is chosen as the base year,the price index for year one is:

Quizplus · Accepted Answer

To calculate price index for year one, we use the formula (Price of the good in the current year/Price of the good in base year) x 100. 
Using year 2 as the base year, we can see that the price of the good remains the same in year 2 and year 3 (i.e. $5), so the price index for year 2 and year 3 would be 100. 
To calculate the price index for year 1, we use the price of the good in year 1 ($4) and divide it by the price of the good in year 2 ($5), and multiply that by 100. 
Price index for year 1 = (4/5) x 100 = 80. 
Therefore, the correct answer is B (100).

Assume an Economy Which Is Producing Only One Product