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Teacher's tutorial answer sheet

1. Index numbers are used to give an overview of a group of price changes. For example, the TSX stock index indicates the general movement of the stock market. It is used to indicate a rise or fall in the corporate sector of the economy. In a similar way, the Consumer Price Index generalizes price changes in items typically purchased by households. It is used to monitor inflation and occasionally deflation in consumer goods prices. The CPI is often quoted and changes in the number are often used to adjust incomes through labour contracts or government transfer payments so that consumer buying power keeps up with changing costs.

Refer to the Simulator.

The first row of data presents the average spending for all Canadian households in a base year and the changes in spending in the following year. In the base year the indexes are stated as 100; for example ($50,000/$50,000)*100.

Calculate the new index number resulting from the price changes given in row 1. (102.8) or (($51,410-$50,000)/$50,000)*100.

2. The Consumer Price Index is a weighted average of a group of prices. To simply average all price changes would mean, for example, that a 10% rise in house prices had the same effect on the final average as a 10% rise in hot dogs. To correct this anomaly, a change in housing prices is given more weight than changes in fast food items because people usually spend more on housing than on hot dogs.

Refer to the Simulator.

Use column 3 to find the category that appears to raise the index most. (Tobacco, 16.2%)
Find the category that appears to raise the index least (or lower it most). (Clothing, 2.8%)
What is the simple average of the two changes? (9.5%)
Look at column 2 which shows the amount spent on average for goods in that category. Would the weighted average of the two changes be higher or lower than the simple average? 4% or ((($1,800-50.4)+($1,000+$162))/($1,800+$1,000))*100.

Explain your answer. (Since the amount spent on clothing is almost double that on tobacco, the effect of its price drop must weigh more heavily than the rise in tobacco and offset some of the large price rise.)

3. The CPI identifies price changes by regularly surveying the actual prices of over 600 items normally purchased by consumers. This is called a 'basket of goods.' Column 1 of the Simulator identifies 19 major categories.

Refer to the Simulator.

Click on several of the categories in column 1. Each click will bring up a subcategory of items contained in that portion of the basket.

Select one of the categories, list two of the subcategories in which you made purchases in the last year, and identify two actual items for each:

3. ___________________
   item
   1. _________________
   2. _________________
4. ___________________
   item
   1. _________________
   2. _________________

Items you listed are probably typical of those priced in the CPI survey.