Question

The production of an item for the current year has increased by one and a quarter times in relation to the base year’s production then the index number of production of the item for the current year is _____

Answer 1

Answer:

If inflation is the percentage change of the price level, what is the “price level”? When economists talk about the price level, what they mean is the average level of prices. To calculate the price level, they begin with the concept of a market basket of goods and services. Imagine a weekly trip to the grocery store. Think about the items you place in your shopping cart (or basket) to buy. That is your market basket. More formally, when economists talk about a market basket of goods and services, they are referring to the different items individuals, businesses, or organizations typically buy.

The next step is to identify the prices of those items, and create a weighted average of the prices. Changes in the prices of goods for which people spend a larger share of their incomes will matter more than changes in the prices of goods for which people spend a smaller share of their incomes. For example, an increase of 10% in the rental rate on housing matters more to most people than whether the price of carrots rises by 10%. To construct an overall measure of the price level, economists compute a weighted average of the prices of the items in the basket, where the weights are based on the actual quantities of goods and services people buy.