Social Sciences and History / Unit 14 SSH 1322 worked example, 60 to 90 seconds
A Basket, an Index, a Base Year: Computing Inflation
The idea
The exam gives prices or index numbers and asks the inflation rate, and the anchor's method is three steps. First, a basket of goods and services: a hypothetical set of items in fixed quantities meant to represent typical purchases. Second, the price level: the total cost of that basket, expressed as an index number, a unit-free figure set to one hundred in an arbitrary base year, so the index in another year shows the cumulative change; an index of one hundred five means five percent inflation since the base year. Third, the inflation rate: the percentage change between price levels or index numbers from one period to the next.
In practice
Given "the basket cost two hundred in the base year and two hundred twenty this year", the index is one hundred ten, and inflation since the base year ten percent. Given "the index rose from one hundred ten to one hundred twenty-one", inflation this year is ten percent, not eleven, because the change is measured against one hundred ten. Ask what the denominator is: the base year for cumulative change, last year for the annual rate.
Where people slip
The trap is subtracting index numbers and calling the difference a percentage; divide by the starting index. The second trap is the base year, which is arbitrary and carries no meaning of its own.
Your place on the trail
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Builds on
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