Which of the following statements is/are correct?
- A price index captures the change in the average price of a constant basket of commodities.
- If the price index takes values 100, 110 and 121 in three consecutive years respectively, then the inflation rates in the 2nd and 3rd years are 10% and 21% respectively.
Select the correct answer using the code given below.
1 only
2 only
Both 1 and 2
Neither 1 nor 2
Answer is Wrong!
Answer is Right!
This question was previously asked in
UPSC CDS-1 – 2024
– Statement 2 is incorrect. The inflation rate in a given year is the percentage change in the price index compared to the *previous* year.
– Inflation rate in the 2nd year = [(Index in Year 2 – Index in Year 1) / Index in Year 1] * 100 = [(110 – 100) / 100] * 100 = 10%. This part is correct.
– Inflation rate in the 3rd year = [(Index in Year 3 – Index in Year 2) / Index in Year 2] * 100 = [(121 – 110) / 110] * 100 = (11 / 110) * 100 = 10%. The statement says 21%, which is incorrect. The 21% represents the cumulative increase from Year 1 to Year 3.