In which order is the inflation rate calculated? Place the following steps in the correct order. (i) choose a base year and calculate the consumer price index (CPI) (ii) fix the basket (iii) calculate the cost of the basket (iv) obtain the prices of the items in the basket (v) Calculate the inflation rate[Fill in the blank]

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BlackTom AI · Accepted Answer

To determine the correct order, I will assess what each step involves and how they logically lead to the inflation rate calculation.
Option a: (ii), (iv), (iii), (i), (v). This sequence starts with fixing the basket (ii), then obtaining the prices of the items in the basket (iv), followed by calculating the cost of the basket (iii). After that, it instructs to choose a base year and calculate the consumer price index (CPI) (i), and finally to calculate the inflation rate (v). This order makes sense because you must define what is in the basket and know the current price of those items before computing the total cost, then compare to a base-year index to derive inflation.
Option b: (i), (iii), (i), (iv), (v). This option begins with choosing a base year and calculating the CPI before you have fixed the basket or gathered current prices, which is illogical. It also repeats step (i), which doesn’t fit the described process.
Option c: (ii), (iv), (iii), (v), (i). Here after computing the cost of the basket (iii), the sequence asks to calculate the inflation rate (v) before selecting a base year and computing the CPI (i). The inflation rate depends on a CPI comparison to the base year, so arriving at inflation before defining the base CPI is incorrect.
Option d: (iii), (i), (ii), (iv), (v). This choice starts with calculating the cost of the basket (iii) without first fixing the basket or obtaining prices (ii, iv). It also places the CPI calculation (i) before fixing the basket and prices, which breaks the logical order of construction of the index.
In summary, only option a maintains a coherent sequence from defining the basket (ii) to pricing (iv), totaling the basket cost (iii), then establishing the base CPI (i), and finally computing the inflation rate (v). The other options misorder essential steps or repeat steps inappropriately, leading to an invalid process.

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